THE  LIBRARY 

OF 

THE  UNIVERSITY 
OF  CALIFORNIA 

LOS  ANGELES 


SOUTHERN   BRANCH 

UNIVERSITY  OF  CALIFORNIA 
LIBRARY 

LOS   ANGELES,  CALIF. 


Library 
Graduate  School  of  Business  Administration' 


Real  Estate  Accounts 


Treating  of  the  Proper  Classification,  Con- 
struction, and  Operation  of  Accounts  for  the 
Real  Estate  Business,  including  Forms 


By 

WALTER  MUCKLOW,  C.  P.  A. 

Member  American  Institute  of  Accountants 


NEW  YORK 

THE  RONALD  PRESS  COMPANY 


Copyright,  1917,  by 
THE  RONALD  PRESS  COMPANY 


Bus.  Admin. 
Library 


HF 


R3M8 

PREFACE 


It  is  a  curious  circumstance  that,  although  accountants 

generally  recognize  the  value  of  real  estate  as  an  asset,  and 

j^    frequently  give  evidence  of  that  belief  by  assigning  it  a 

certain  pre-eminence  when  marshalling  assets  or  arranging 

a  balance  sheet,  there  is  little  literature  on  the  subject  of 

^     real  estate  accounting,  either  here  or  abroad. 

One  reason  for  this  may  be  found  in  the  fact  that,  until 
1*     recently,  we  have  been  almost  entirely  dependent  upon  Eng- 
, »      land  and  Scotland  for  our  accountancy  literature ;  and  in 
^     those  countries  there  is  not  the  constant  development  of 
wild  lands,  timber  tracts,  and  suburban  properties,  nor  the 
^    large  and  rapid  increase  in  the  growth  of  cities,  so  evident 
,    throughout  the  United  States;  nor  is  there  that  habit  of 
y?     quick  trading  which  here  has  become  a  second  nature.    Un- 
der such  circumstances  it  is  but  natural  that  across  the 
Q      ocean  the  matter  has  been  overlooked  or  postponed;  and 
on  this  side  of  the  water  accountants  have  been  so  fully 
occupied  in  keeping  abreast  of  their  work  that  they  have 
had  but  little  time  at  their  disposal  in  which  to  tell  others 
what  they  are  doing. 

A  writer  in  the  United  States  treating  of  this  subject, 
is  then,  in  a  sense,  a  pioneer  and  may  with  propriety  beg 
for  himself  and  for  his  book  the  consideration  and  the  al- 
lowances usually  conceded  to  pioneers  in  all  fields. 

While  the  main  foundations  of  accounts  are  identical 
throughout  the  world,  and  it  is,  for  example,  as  unwise  in 
Finland  as  in  Florida  to  anticipate  profits  or  to  allow  a 
fictitious  valuation  of  assets,  the  structures  raised  on  these 
foundations  may  vary  as  greatly  as  do  the  winter  quar- 

iii 


IV 


PREFACE 


ters  of  a  Finn  and  those  of  a  Floridian.  Under  these  cir- 
cumstances it  is  unavoidable  that  many  of  the  instances  and 
examples  given  in  the  following  pages  should  be  almost 
pointless  outside  of  the  United  States,  although  the  author 
has  endeavored  to  present  principles  in  a  form  so  broad, 
and  to  give  examples  of  a  character  so  typical,  that  they 
may  be  of  some  service  wherever  real  estate  accounting  is 
employed. 

While  no  originality  is  claimed  for  the  principles  which 
are  enunciated,  the  methods  which  are  advocated,  together 
with  nearly  all  the  forms  presented,  are  the  results  of  the 
author's  personal  practice ;  no  merit,  however,  is  claimed  for 
the  fact  that  they  have  originated  with  him  and  have  not 
been  "compiled"  from  other  sources,  the  simple  reason  for 
this  being  that  he  has  been  unable  to  find  any  sources  from 
which  it  was  possible  to  compile. 

Special  attention  is  given  to  the  treatment  of  "time 
sales,"  and  the  procedure  described  is  original  and  is  de- 
veloped to  a  greater  degree  than  has  been  general.  The 
rapid  growth  of  "development"  companies,  the  lack  of  uni- 
formity, and  the  frequent  disregard  of  the  principles  in- 
volved, all  combine  in  calling  for  a  rather  full  treatment  of 
this  interesting  branch  of  the  subject. 

Legal  questions  wrill  frequently  arise  in  connection  with 
real  estate  accounting,  and  to  a  lawyer  the  legal  statements 
of  the  present  volume  may  appear  meager  and  crude.  The 
author  has,  however,  attempted  to  give  merely  such  ex- 
planations of  these  matters  as  are  necessary  to  enable  the 
real  estate  accountant  to  make  his  entries  intelligently  and 
in  conformity  with  legal  requirements. 

No  attempt  has  been  made  to  give  examples  of  the 
various  legal  forms  employed  in  connection  with  real  es- 
tate, such  as  deeds  and  contracts.  They  already  occupy 
much  space  in  many  volumes ;  and  the  general  usefulness  of 


PREFACE  v 

such  a  collection,  unless  it  is  complete,  is  impaired  by  the 
fact  that  the  forms,  while  perhaps  excellent  for  Illinois, 
for  example,  may  utterly  fail  to  comply  in  some  essential 
with  the  statutory  requirements  of  other  states. 

The  object  of  bookkeeping  is  to  show  not  only  the  re- 
sults obtained  by  an  enterprise,  but  also  the  causes  of  these 
results  —  not  only  to  exhibit  a  gain  or  a  loss,  but  to  show 
whence  came  the  values  gained,  or  whither  went  the  values 
lost.  The  very  form  of  a  trading  statement  or  of  a  profit 
and  loss  account  shows  on  its  face  that  this  is  the  object  of 
its  existence.  But  while  the  truth  of  this  statement  is  gen- 
erally acknowledged,  many  accounts  may  still  be  found 
which  fail,  in  this  respect  at  least,  to  justify  their  being. 

In  real  estate  accounting,  where  each  item  of  the  in- 
ventory has  an  individuality  entirely  lacking  in  the  case  of 
merchandise  or  manufactured  goods,  both  cause  and  effect 
may  be  shown  with  unusual  clearness.  In  the  present  work 
this  fact  has  been  kept  constantly  in  view,  and  the  methods 
of  accounting  presented  will  be  found  to  show  clearly  at  all 
times  both  the  results  and  the  reasons  therefor  —  even  for 
a  single  lot  of  a  large  subdivision. 

The  present  work  is  intended  primarily  for  the  use  of 
accountants,  but,  inasmuch  as  it  is  designed  also  to  be  of 
practical  service  to  the  real  estate  manager,  the  bookkeeper, 
and  the  student,  considerable  space  is  devoted  to  details 
with  which  accountants  are  already  familiar.  It  is  assumed, 
of  course,  that  all  those  who  use  this  volume  have  at  least 
a  rudimentary  knowledge  of  double-entry  bookkeeping. 

It  may  also  be  said  that  real  estate  is  so  closely  related 
to  a  large  variety  of  enterprises  which  are  not  primarily 
concerned  with  real  estate,  that  a  study  of  real  estate  ac- 
counting proper  involves  some  knowledge  of  these  other 
businesses.  While,  therefore,  the  present  volume  is  devoted 
to  real  estate  accounting,  digressions  have  at  times  seemed 


VI 


PREFACE 


necessary,  in  order  to  explain  particular  points  of  contact 
with  other  kinds  of  business. 

\Yhile  the  author  believes  that  the  theories  presented 
and  the  practice  outlined  in  the  present  volume  are  sound, 
his  readers  will  doubtless  discover  matters  of  importance 
which  have  been  omitted,  and  other  matters  which  are  not 
presented  as  clearly  as  they  might  be.  Suggestions  looking 
to  a  betterment  of  the  book  in  any  way  will  be  received 
with  gratitude,  and  will  be  utilized  in  the  preparation  of 
subsequent  editions. 

The  author's  fairly  wide  professional  experience  con- 
vinces him  that  one  suggestion  may  not  be  entirely  out  of 
place.  A  patient  might  read  treatises  on  the  disease  from 
which  he  suffers,  but  he  would  consult  a  physician  to  pre- 
scribe the  remedy;  and  a  wise  land  owner  about  to  erect 
an  office  building  would  secure  all  the  information  on  the 
subject  obtainable,  but  he  would  engage  an  architect  to 
draw  the  plans.  In  the  same  way,  it  is  to  be  hoped  that 
the  manager  of  a  real  estate  concern  will  not,  when  im- 
portant accounting  matters  of  a  technical  nature  are  on 
hand,  trust  solely  to  any  treatise  on  real  estate  account- 
ing, but  will  seek  the  assistance  of  a  trained  and  qualified 
accountant. 

WALTER  MUCKLOW. 
Jacksonville,  Florida, 
June  15,  1917. 


CONTENTS* 


CHAPTER  PAGE 

I     DEFINITIONS i 

§     I.  Definitions  of  Terms 

II     RECORDS  FOR  REAL  ESTATE 4 

§    2.  Records  Required 

3.  Use  of  Records  to  Officers 

4.  Loose-Leaf  and  Card  Records 

5.  List  of  Real  Estate  Records 

6.  Separate  Books  for  Each  Class  of  Accounts 

7.  Condensed  Records 

III  CORPORATE  RECORDS n 

§    8.  Minute  Book 

9.  Stock  Certificate  Book 

10.  Stock  Record   or   Stock  Ledger 

n.  Subscription   Ledger 

IV  GENERAL  BOOKS  OF  ACCOUNT 16 

§  12.  General  Receipt  Book 

13.  Cash  Book 

14.  Petty  Cash  Book 

15.  Superintendent's  Cash  Book 

16.  Journal 

17.  General  Ledger 

V     SUB-LEDGERS 30 

§  18.  Mortgages  Receivable  Ledger 

19.  Mortgages  Payable  Ledger 

20.  General  Contracts  Ledger 

21.  Commissions  Payable  Ledger 

22.  Brokerage  (Commissions  Earned)  Ledger 

23.  Subdivision   Customers  Ledgers 

VI     PROPERTY  RECORDS 45 

§  24.  Report  of  Real  Estate  Transactions 

25.  Property  Index 

26.  Property  Ledger — Wild  Lands 

27.  Property  Ledger — City  Properties 

28.  Field  Record 

29.  Subdivision  Ticklers 

30.  Plat  Book 

31.  Record  of  Deeds  Received 

32.  Record  of  Deeds  Issued 

33.  Record  of  Contracts  Issued 

34.  Record  of  Options  Granted 

35.  Subdivision   Histories 


"For  list  of  forms,  see  Index,  page  343. 

vii 


viii  CONTENTS 

CHAPTER  PACE 

VII     RENT  RECORDS ....     74 

§  36.  Record  of  Leases  Given 

37.  Rent  Register  (House  Address  Book) 

38.  Rent  Receipt  Books 

39.  Report  of  Rent  Collections 

40.  Rent   Cash   Book 

41.  Rent  Journal 

42.  Rent  Ledger 

43.  Collector's  Pocket  Rent  Ledger 

VIII     MISCELLANEOUS  RECORDS 85 

§  44.  Fire  Insurance  Record 

45.  Bills    Receivable   and    Bills   Payable 

46.  Land  Notes 

47.  Mortgage  Interest 

48.  Expense  Account  Analysis  Book 

IX    THE  ACQUIREMENT  OF  REAL  ESTATE 90 

§  49.  Methods  of  Acquiring  Real  Estate 

50.  Accounting  Procedure 

51.  Entries  Required 

52.  Mortgages  Payable 

53.  Legal  Obligations  of  Mortgagor 

54.  Contracts  Payable 

55.  Trusts  and   Trustees 

X    PROPERTY  COSTS 96 

§  56.  The  Elements  of  Cost 

57.  Treatment  of   Costs 

58.  Cost  of  Improvements 

59.  Repairs,   Renewals,   and   Improvements 

60.  Definitions 

61.  Repairs 

XI    CARRYING  CHARGES .   102 

§  62.  Interest  and  Taxes 

63.  Interest  as  Part  of  Cost 

64.  Inventories  at  Cost 

65.  Interest  on  Cost 

66.  Treatment  of  Interest  Charges 

67.  Depreciation  as  Affecting  Cost 

68.  Taxes 

69.  Assessments 

70.  Cost  of  Maintenance  and  Operation 

71.  Profits  on  "Value"  and  "Investment" 

XII     SALES  OF  REAL  ESTATE no 

§  72.  Time  Sales 

73.  Final  Sales 

74.  Form    of    Entries    Relating    to    Sales    of 

Property 

75.  Legal  Expenses 

76.  Surrender  of  Contract 


CONTENTS  }x 

CHAPTKR  PAGE 

XIII  PROFITS  FROM  REAL  ESTATE  SALES 116 

§  77.  Definition  of  Profits 

78.  Sources  of  Profits 

79.  Profits  from  Sales 

80.  Cost  Price 

81.  Selling  Price 

82.  Earned  Profit 

83.  Mortgage  Assumed  by  Purchaser 

84.  Large    Cash    Payment — Balance    Secured 

by  Mortgage 

85.  Small    Cash    Payment — Balance    Secured 

by  Mortgage 

86.  Gain  on  Sales  Account 

87.  Sales  on  Contract 

88.  Exchange  of  Properties 

89.  Appraisal  of  Property 

90.  Development  Properties 

91.  Hidden  Profits 

92.  Anticipated  Profits 

XIV  PROFITS  FROM   RENTS 125 

§  93-  Rent 

94.  Leases 

95.  Gross  Rent  and  Net  Rent 

96.  Net  Rent  and  Net  Returns 

97.  When  Should  Rents  Be  Entered   ? 

98.  Rents  from  Mines  and  Similar  Sources 

99.  Treatment  of   Mining  Rents 

XV     PROFITS  FROM  ENHANCEMENT  OF  VALUE  AND  FROM 

MISCELLANEOUS  SOURCES 132 

PROFITS  FROM  ENHANCEMENT  OF  VALUE 

§  loo.  Increased  Value  of  Mineral  Lands 

101.  Enhanced  Real  Estate  Values 

102.  Fluctuations  in  Real  Estate  Values 

103.  Bank  Practice 

104.  Accounting  Treatment 

105.  Rights  of  Stockholders 

106.  Effect  of  Enhanced  Real  Estate  Values 

on  Rent  Charges 

107.  Summary 

PROFITS  FROM  MISCELLANEOUS  SOURCES 

108.  Profits   from  Money  Borrowed  on  Real 

Estate 

109.  Operation  of  Manufacturing  Properties 
no.     Operation  of  Agricultural  Properties 
in.    Operation     of      Orchards — Increase      in 

Value 

112.  Showing  Profit  on  Annual  Statements 

113.  Profits  from  Crops  Other  than  Fruit 


X  CONTENTS 

CHAPTER  PACE 

XVI    TIME   SALES — MORTGAGES 141 

§  114.  Time  Sales 

115.  Classes  of  Time  Sales 

116.  Mortgages 

117.  Mortgage  Notes 

118.  The  Instalment  Mortgage 

119.  Annuity  Tables 

120.  Change  of  Ownership 

121.  Foreclosures 

XVII     TIME   SALES — CONTRACTS 152 

§  122.  Simple  Form  of  Contract 

123.  Conditions  Applying  to  Contracts 

124.  Precision  as  to  Amount  of  Sale 

125.  Pass-Book  Contracts 

126.  Cancellation  of  Contracts 

127.  Comparative   Advantages   of   Mortgages 

and  Contracts 

128.  Contract  Statements 

129.  Contract  Accounts 

XVIII     OPTIONS      .          163 

§  130.    Nature  of  an  Option 

131.  Accounting  Treatment  of  Options 

132.  Refusals 

133.  Deeds  in  Escrow 

XIX     INTEREST 166 

§  134.     Mortgage  Interest 

135.  Interest   Adjustments 

136.  Unearned  Interest 

137.  Unearned    Interest — Methods    of    Calcu- 

lating 

138.  Unearned  Interest — Alternative  Methods 

of   Calculating 

139.  Unearned    Interest — Various   Examples 

140.  Unearned    Interest — Phraseology   of    In- 

terest  Clause 

141.  Unearned  Interest — Journal  Entries 

142.  Interest  Accrued  Not  Due 

XX     EARNED  PROFITS  AND  BOOK  PROFITS 178 

§  143.     Book   Profits 

144.  Gains  Distinguished  from  Earned  Profits 

145.  Rule  for  Calculating  Earned  Profits 

146.  Anticipation   of   Earned   Profits 

147.  Equity  as  a  Basis  for  the  Calculation  of 

Profits 

XXI     CANCELLATIONS  OF  TIME  SALES     .     .     .     .     .     .   185 

§  148.     Time  Sa-les  and  Cancellations 

149.  Amount  of  First  Payment 

150.  Payments  in  Arrears 

151.  Accounting  Treatment  of   Cancellations 

152.  Erroneous   Cancellation   Entries 


CONTENTS  xi 

CHAPTER  PAGE 

153.  Cancellation  Profits  Account 

154.  Cancellation  of  Subdivision  Sales 

XXII     SUBDIVISION,  DEVELOPMENT,  AND  SUBURBAN  PROP 

ERTIES 192 

§  155.  Acquirement 

156.  Release  of  Lots  from  Encumbrances 

157.  Cost   Price  of   Property 

158.  Cost  Per  Lot 

159.  Cost    Price    When    Improvements    Are 

Incomplete 

160.  "Constant   Cost   Price" 

161.  Comparison  of  Cost  Finding  Methods 

162.  Check  on  Unsold  Lots 

163.  Subdivision    Property    Expenses 

164.  Advertising  Expense 

165.  Advances  to  Settlers 

XXIII  EARNED    PROFITS   ON    SUBDIVISION,    DEVELOPMENT, 

AND  SUBURBAN  PROPERTIES 201 

§  166.  Determination  of  Earned  Profits 

167.  The  Cost  Price 

168.  The   Selling  Price 

169.  The  Average  Profit 

170.  Amount  of   Payments   Actually  Made 
171  Reserve  Profit  Account 

172.  Application  of  Rule 

173.  Alternative   Methods 

174.  Special   Subdivision  Ledger 

175.  Use  of  Special  Ledger 

176.  Holding   Subdivision  Properties 

XXIV  SELLING  CONTRACTS 214 

§  1*7.    Definition  of  Selling  Contract 
178.    Classes  of  Selling  Contracts 
379.     Treatment   of    Selling    Contracts    in    the 
Accounts 

XXV    ANALYSIS  OF  A  TYPICAL  TRIAL  BALANCE     .     .     .  217 

§  180.  Clean   Bookkeeping 

181.  A  Typical  Trial  Balance 

182.  (i)  Accounts   Payable 

183.  (2)  Advertising 

184.  (3)  Automobiles 

185.  (4)   Bills    Payable 

186.  (5)   Bills    Receivable 

187.  (6)  Brick-yard  Royalties 

188.  (7)  Building— Green 

189.  (8)   Building— Black 
100.  (9)   Building — Brown 

191.  (10)  Cancellation   Profits 

192.  (u)  Capital  Stock 

193.  (12)  Charity 


xii  CONTENTS 

CHAPTER  PAI;K 

194.  (13)  Commissions    Earned;    (14)    Com- 
missions Paid 

195-  (15)  Contracts 

196.  (16)  Contracts   Payable 

197.  (17)  Dawes   Purchase 

198.  (18)  Directors'  Meetings 

199.  (19)  Unpaid  Dividends 

200.  (20-23)  Eureka  Gardens  Accounts 

201.  (24)  Expense,  General 

202.  (25)  Expense,  Legal 

203.  (26)  Expense,   Mortgage 

204.  (27-30)  Fairmount  Accounts 

205.  (31)  Gain  on  Sales 

206.  (32-34)  Grandville   Accounts 
207-  (35i)  Handbook 

208.  (30)  Hilton,  A.  B. 

209.  (37)  Improvements 

210.  (38)   Fire    Insurance,    etc.;    (39)    Mort- 

gage Insurance 

211.  (40)  Interest  Earned;   (41)  Interest  Paid 

212.  (42)  Mortgage    Interest    Payable;    (43) 

Overdue   Mortgage   Interest   Payable 

213.  (44)  Mortgage  Interest  Receivable;   (45) 

Overdue  Mortgage  Interest  Receivable 

214.  (46)  Interest  Unearned 

215.  (47)  Judgments 

216.  (48-54)  Kingslake  Accounts 

217.  (49)  Kingslake    Purchase;    (52)    Kings- 

lake  Lots 

218.  (50)  Kingslake  Gains 

219.  (51)  Kingslake    Expense 

220.  (53)  Kingslake  Commissio'ns 

221.  (55-60)  Ladore  Accounts 

222.  (59)  Ladore  Commissions 

223.  (60)  Ladore  Town  Lots 

224.  (61)  Life  Insurance 

XXVI    ANALYSIS  OF  A  TYPICAL  TRIAL  BALANCE  (Continued)  243 

§  225.  (62-65)  Malvern  Hill   Accounts 

226.  Malvern    Hill    Determination    of    Profits 

227.  (66)  Manning,  R. 

228.  (68)  Mortgages    Payable;     (69)     Mort- 

gages   Receivable 

229.  (67)  Mortgage  Deficiency  Account ;  (70) 

Mortgages  in  Settlement 

230.  (71)  Office  Furniture;    (72)    Office  Fix- 

tures 

231.  (73)  Options  Granted;  (74)  Options  Held 
232-     (75-79)   Parkville  Accounts 

233.  (80)  Petty  Cash 

234.  (81)  Postage 

235.  (82)  Profit  and  Loss 

236.  (83)  Profits 


CONTENTS  xiii 

CHAPTER  PAGE 

237.  (84-87)   Prospect  Park  Accounts 

238.  (88)  Real  Estate 

239.  (89)  Rent  Account 

240.  (go)  Repairs 

241.  (91)  Rinders,     T. ;     (92)     Rinders,     T. ; 

Reserve 

242.  (93)   Robinson,  J.,  Trustee 

243.  (94)   Salaries;      (106)      Stationery     and 

Printing 

244.  (95-104)  South  Bay  Accounts 

245.  (105)   Sperry,  J.  M. 

246.  (107)   Stumpage 

247.  (108)  Suspense 

248.  (109)  Taxes 

249.  (no)  Mortgage  Taxes 

250.  (111-114)  Torbay  Heights  Accounts 

251.  (115)  Treasury  Stock 

252.  (116)  Cash — Superintendent 
253-  (117)  Cash  in  Bank 

254.  Preparation  of  Balance  Sheet 


XXVII     THE  TRIAL  BALANCE  AND  MONTHLY  STATEMENTS  .  260 

§  255.  The  Purpose  of  a  Monthly  Trial  Balance 

256.  The  Monthly  Statement 

257.  Advantages    of    the    Monthly    Statement 

258.  Method  of  Preparing  the  Monthly  State- 

ment 

259.  Determination  of  Earned  Profits 

260.  Comparison   of    Monthly    Statements 

261.  A.  General    Accounts 

262.  B.  Expense 

263.  C.  Earnings 

264.  D.  Real   Estate 

265.  E.  Selling  Contracts 

266.  F.  Contracts 

267.  G.  Profits  in  Reserve 

268.  H.  Summary 

269.  I.  Sales    and    Cancellations 

270.  J.  Cash  Receipts  for  the  Month 

271.  K.  Earned  Profits — Cash  Receipts 


XXVIII     THE  BALANCE  SHEET,  THE  ANNUAL  REPORT,  AND 

SCHEDULES 274 

§  272.     Nature  of  the  Balance  Sheet 

273.  Continental  and  English  Forms  of  Bal- 

ance Sheet 

274.  Arrangement  of  Balance  Sheet  Items 

275.  Schedules      Accompanying      a      Balance 

Sheet 

276.  Form  of  Balance   Sheet 

277.  Schedules  to  Accompany  Annual  Report 


xiv  CONTEXTS 

CHAPTER  PAGE 

XXIX    REAL  ESTATE  AUDITS 283 

§  278.  Real   Estate   Inventories 

279.  Verification  of  Real  Estate  Assets 

280.  Examination  of  Records 

281.  Mortgage  Frauds 

282.  Details  of  an  Audit 

283.  Methods  of  Conducting  an  Audit 

284.  Audit  of  Cash  Receipts 

285.  Audit  of  Cash  Disbursements 

286.  Audit  of   Property  Ledger 

287.  Appraisals  of  Real  Estate 

288.  Mortgages   Receivable 

289.  Commission  Accounts 

290.  Contracts 

291.  Auditing  Subdivision  Property 

292.  Subdivision  Sales 

293.  Subdivision  Histories 

294.  Equipment 

295.  Sundry  Debtors 

296.  Capital  Stock  and  Treasury  Stock 

297.  Mortgages    Payable,    Contracts    Payable, 

Bills  Payable,  Sundry  Creditors 

298.  Purchase   Accounts 

299.  Unpaid  Dividends 

300.  Rents  and  Repairs 

301.  Reserve  Accounts 

302.  Reserve  Profits 

303.  Profit  and  Loss  Account 

304.  Auditing  Time   Sales 

305.  Trustees'  Accounts 

XXX    AGENTS  AND  BROKERS,  AND  THEIR  ACCOUNTS     .      .  300 

§  306.  Accounts  for  Office  Buildings  and  Apart- 
ment Houses 

307.  Monthly  Reports 

308.  Brokers'  Records 

309.  Commissions 

XXXI    REAL  ESTATE  ORGANIZATIONS 307 

§  310.  Abstract  Companies 

311.  Leasehold   Companies 

312.  Building  and  Loan  Societies 

313.  Cemeteries 

314.  Cemetery  Subdivision  Accounts 

XXX II     DEPRECIATION 313 

§  315.  Depreciation  of  Realty 

316.  Nature  of  Depreciation 

317.  Systemmatic  Treatment  of  Depreciation 

318.  Percentage  of   Depreciation 

319.  Calculation  of   Depreciation 

.     320.  Depreciation  vs.  Appreciation 

321.  Depreciation  on  the  Balance  Sheet 

322.  Depreciation  on  Leasehold  Property 


CONTENTS  xv 

CHAPTER  PACK 

XXXIII  INSURANCE  RECORDS 319 

§  323.     Expiration  Register  and  Card  System 

324.  Life  Insurance  in  Connection  with  Time 

Sales 

325.  Life  Insurance  in  Connection  with  Mort- 

gages  Payable 

XXXIV  RENT  RECORDS;   BUILDING  ACCOUNTS     ....  324 

RENT   RECORDS 

§  326.  Rentals 

327.  Records  Used 

328.  Repairs 

329.  The  Rent  Ledger 

330.  Arrangement  of  Rent  Ledger 

331.  Rent   Collectors 
332.,  Vacant   Houses 

BUILDING  ACCOUNTS 

333.  Building    Operations    and    Building    Ac- 

counts 

334.  Building    Operations — Subdividing   Costs 

XXXV    TAXES 333 

§  335-     Entering  Tax  Payments  on  the  Books 

336.  Mortgage  Taxes 

337.  Descriptions 

338.  Federal  Income  Tax 

339.  Distinction       Between       "Gains"       and 

"Profits" 

XXXVI    FILING 339 

§  340.     Scope  of  Filing  System 

341.  Consecutive  Numbering 

342.  Sundry   Documents 

343.  Ticklers 


Real  Estate  Accounts 


CHAPTER   I 

DEFINITIONS 

§  i.    Definitions  of  Terms 

Before  dealing  with  real  estate  accounting,  it  is  neces- 
sary to  understand  clearly  what  constitutes  "real  estate." 
The  Century  Dictionary  gives  the  following  definition: 
"Land,  including  with  it  whatever  by  nature  or  artificial 
annexation  inheres  with  it  as  a  part  of  it  or  as  the  means 
of  its  enjoyment,  as  minerals  on  or  in  the  earth,  standing 
or  running  water,  growing  trees,  permanent  buildings,  and 
fences." 

Buildings,  orchards,  mines,  etc.,  are  therefore  real  es- 
tate and  should  be  shown  as  such.  It  is  not  uncommon  to 
find  under  the  head  of  assets  such  an  entry  as — 


Real  Estate 

Buildings  (or  Improvements) 


This  is  incorrect,  and  should  be  of  the  form  : 

Real  Estate : 

Land $ 

Buildings 


In  the  present  work,  for  the  sake  of  brevity,  uniformity, 
and  clearness,  the  following  words  and  phrases  are  used 
with  the  limited  meanings  given.  It  will,  of  course,  be  un- 

i 


2  REAL    ESTATE   ACCOUNTS 

derstood  that  these  limitations  are  purely  arbitrary,  and 
apply  only  to  the  use  of  these  words  and  phrases  in  this 
book.  This  is  especially  true  in  regard  to  the  terms 
"gains"  and  "profits,"  which  are  usually  synonymous  and 
interchangeable. 

1.  Contracts.     This  term  is  always  applied  to  any  kind 
of  lease  or  agreement  providing  for  the  sale  of  real  estate 
on  an  instalment  plan. 

2.  Gain;  Gain  on  Sales.     These  expressions  are  used 
to  indicate  the  gross  gain  on   sales,   or  book   profits  on 
transactions,  in  which  the  payment  of  the  full  purchase  price 
is  deferred  and  the  profit   has  therefore  not  been   fully 
realized.     Such  "gains"  are  not  available  for  dividend-pay- 
ing purposes  until  they  have  become  "profits." 

3.  Profits;  Realized  Profits;  Earned  Profits.     These 
terms  are  used  to  designate  "gains"  that  have  been  earned 
or  realized — gains  that  may  be  carried  to  the  Profit  and 
Loss  account  as  distinguished  from  those  which  are  some- 
times called  "book  profits." 

4.  Time  Sales.     In  this  classification  are  included  all 
sales  which  are  not  paid  for  in  cash  or  its  equivalent — 
sales  in  which  the  purchaser  is  allowed  time  for  the  com- 
pletion of  the  payment  for  the  property.     They  are  also 
known  as  sales  "on  the  instalment  plan,"  "on  deferred  pay- 
ments," etc. 

5.  Subdivision  Properties.     This  term  is  used  to  indi- 
cate such  properties  as  consist  of  a  number  of  lots  or  farms, 
these  together  forming  a  whole  tract.     Such  properties  are 
also   known   as   "allotment,"   "development,"    "suburban," 
etc.,  properties. 

6.  General  Contracts.    This  classification  is  intended  to 
include  contracts  given  by  the  concern  on  properties  other 
than  subdivision  properties,  which  frequently  require  more 
detailed  accounting  than  subdivision  contracts. 


DEFINITIONS  3 

7.  Contracts  Payable,     This  term  applies  to  contracts 
entered  into  by  the  concern  for  the  purchase  of  property. 
They  are  therefore  the  reverse  of  the  contracts  considered 
under  ( i )  on  the  preceding  page.     Contracts  payable  vary 
in  form  to  meet  the  circumstances.     While  they  may  not 
carry  any  obligation  to  complete  the  purchase,  and  may 
be  therefore  in  the  nature  of  a  contingent  liability,  they 
differ  from  the  obligation  toward  the  owner  under  a  "selling 
contract,"  inasmuch  as  all  payments  made  by  the  concern 
are  forfeited  if  the  contract  payable  is  not  completed. 

8.  Selling  Contracts.    By  this  term  is  meant  a  contract 
giving  the  concern  the  right  to  sell  certain  property  owned 
by  another,  the  title,  as  a  rule,  not  passing  through  the 
concern. 

9.  The  Concern.     This  term  is  used  to  designate  the 
proprietor  of  the  accounts  under  consideration;  it  may  be 
a  corporation,  a  partnership,  or  an  individual  acting  either 
for  himself  or  in  a  fiduciary  capacity.     In  some  cases  "the 
concern"  is  an  owner ;  in  others,  merely  a  broker  or  agent ; 
so,  as  a  matter  of  convenience,  the  word  "concern"  is  used 
to  cover  all  cases. 


CHAPTER   II 

RECORDS    FOR    REAL   ESTATE 

§  2.    Records  Required 

To  record  properly  all  transactions  arising  in  connec- 
tion with  real  estate,  a  considerable  number  of  books  and 
forms  must  be  provided.  No  one  concern  may  need  them 
all,  but  they  are  treated  here  to  provide  for  the  varying 
conditions  and  requirements  of  the  real  estate  business. 

In  a  large  business,  such  as  that  of  many  land  develop- 
ment companies,  the  books  will  be  numerous,  for  efficient 
management  requires  that  the  business  be  regarded  from 
many  standpoints.  The  more  important  activities  of  such 
a  concern  may  be  roughly  classified  as  follows : 

1.  The  management  of  its  capital  and  the  recording 

of  all  items  relating  thereto. 

2.  The  collection  of  income  arising  from  the  opera- 

tions of  the  business,  and  the  proper  entering 
thereof  in  the  books  of  account. 

3.  The  proper  recording  of  each  piece  of  property  in 

which  the  concern  has  any  interest. 

4.  The  recording  of  all  sales,  with  full  details  in  each 

case. 

5.  The  keeping  of  an  account  with  each  debtor  to  and 

creditor  of  the  concern. 

§  3.    Use  of  Records  to  Officers 

It  not  infrequently  happens  that  there  are  several  of- 
ficers in  a  real  estate  company,  and  perhaps  several  com- 
mittees, each  looking  at  the  affairs  of  the  concern  from  a 

4 


RECORDS    FOR   REAL   ESTATE  5 

different  standpoint  and  requiring  different  information. 
This  necessitates  the  keeping  of  accounts  in  such  detail  and 
yet  in  such  clear  form  that  they  may  be  readily  understood 
by  each  of  the  interested  parties.  Under  such  circumstances 
its  records  must  be  arranged  to  fill  the  following  require- 
ments at  all  times  and  on  short  notice : 

1.  To  keep  the  manager  of  the  business  informed  as 

to  its  general  condition. 

2.  To  inform  the  treasurer  as  to  his  current  resources 

and  liabilities,  and  particularly  as  to  approaching 
liabilities,  such  as  notes  becoming  payable,  in- 
surance to  be  renewed,  taxes  to  be  paid,  etc. 

3.  To  show  the  collection  department  the  standing  of 

each  debtor. 

4.  To  inform  salesmen  fully  as  to  all  unsold  proper- 

ties. 

5.  To  show  on  the  face  of  each  account  in  the  prop- 

erty ledger  the  cost  to  date  of  the  property  to 
which  the  account  pertains,  and  to  show  in  their 
appropriate  places  the  costs  of  all  other  securities 
owned. 

§  4.    Loose-Leaf  and  Card  Records 

Except  in  the  cases  of  the  few  general  accounts  speci- 
fied below  as  requiring  bound  books,  the  larger  part  of  the 
real  estate  records  may  be  most  conveniently  kept  in  loose- 
leaf  ledgers  or  on  cards.  In  some  few  cases,  as  for  in- 
stance, insurance  records  (see  §  330),  the  loose-leaf  ledger 
is  much  to  be  preferred  to  cards,  for  two  main  reasons: 

1.  There  is  less  likelihood  of  loss  and  confusion  when 

accounts  are  to  be  consulted. 

2.  It  requires  far  less  space. 

Take  for  example  a  sub-ledger  for  a  subdivision  tract 


6  REAL    ESTATE    ACCOUNTS 

with  750  customers,  to  which  frequent  reference  is  made 
by  the  bookkeepers,  by  the  credit  man,  and  by  a  number 
of  salesmen.  The  examination  of  one  of  these  accounts,  if 
they  are  kept  on  cards,  usually  necessitates  the  removal  of 
that  card  from  the  file,  and,  unfortunately,  these  cards  are 
not  always  returned  promptly.  It  is  perhaps  kept  out  for 
reference,  for  correction,  or  for  copying;  other  matters 
intervene,  its  return  is  postponed  indefinitely,  and  the  card 
too  often  is  lost. 

In  the  case  of  a  loose-leaf  ledger,  on  the  other  hand,  an 
account  to  be  consulted  is  found  in  the  ledger ;  a  slip  may 
be  inserted  to  mark  the  sheet,  but  the  account  itself  never 
leaves  its  proper  place. 

Again,  who  has  handled  card  records  in  any  quantity 
without  seeing  at  least  once  a  file  full  of  cards  dropped 
or  upset,  requiring  hours,  perhaps,  to  sort  out  and  re- 
arrange ? 

As  to  compactness,  the  space  required  for  750  cards  is 
several  times  greater  than  that  required  for  the  same  num- 
ber of  ledger  sheets,  especially  if  the  latter  are  of  thin 
paper.  A  number  of  such  ledgers  containing  thousands  of 
accounts  can  be  kept  in  an  ordinary  safe,  while  an  equal 
number  of  cards  require  a  special  series  of  filing  cabinets 
and  more  vault  space  than  can  as  a  rule  be  conveniently 
given. 

§  5.    List  of  Real  Estate  Records 

The  following  list  is  intended  to  include  the  more  im- 
portant books  and  records  required  in  the  many  ramifica- 
tions of  the  real  estate  business.  The  list  looks  formidable, 
and  in  practice  no  office,  save  perhaps  a  few  of  the  largest, 
would  use  them  all.  All  are  needed,  however,  somewhere, 
at  some  time,  to  record  adequately  the  numerous  and  vary- 
ing transactions  of  real  estate. 


RECORDS   FOR   REAL   ESTATE 

1.  Corporate  Records: 

Minute  Book 

Stock  Certificate  Book 

Stock  Record  or  Stock  Ledger 

Subscription  Ledger 

2.  General  Books  of  Account : 

General  Receipt  Book 
Cash  Book 
Petty  Cash  Book 
Superintendent's  Cash  Book 
Journal 
General  Ledger 

3.  Sub-Ledgers : 

Mortgages  Receivable  Ledger 
Mortgages  Payable  Ledger 
General  Contracts  Ledger 
Commissions  Payable  Ledger 
Brokerage  (Commissions  Earned)  Ledger 
Subdivision  Customers  Ledgers 

4.  Property  Records: 

Report  of  Real  Estate  Transactions 

Property  Index 

Property  Ledger,  Wild  Lands 

Property  Ledger,  City  Lots 

Field  Record,  City  Property 

Field  Record,  Wild  Lands 

Subdivision  Tickler 

Plat  Book 

Record  of  Deeds  Received 

Record  of  Deeds  Issued 

Record  of  Contracts  Issued 

Record  of  Options  Granted 

Subdivision  History 


8  REAL    ESTATE   ACCOUNTS 

5.  Rent  Records: 

Record  of  Leases  Given 

Rent  Register  (House  Address  Book) 

"      Receipt  Book 

"      Reports 

"      Cash  Book 

"      Journal 

"      Ledger 

6.  Miscellaneous  Records : 

Fire  Insurance  Record 

Bills  Payable  Book 

Bills  Receivable  Book 

Mortgage  Interest  Receivable  Record 

Mortgage  Interest  Payable  Record 

Expense  Account  Analysis  Book 

§  6.    Separate  Books  for  Each  Class  of  Accounts 

The  idea  sometimes  prevails  with  those  unfamiliar  with 
accounting  that  the  simplicity  of  an  accounting  system  may 
be  measured  by  the  number  of  books  employed — an  idea 
which  is  frequently  fallacious.  The  simplest  system  is  the 
best,  if  it  is  adequate ;  but  speaking  generally,  nothing  could 
be  more  mistaken  than  the  idea  that  simplicity  and  the 
number  of  books  employed  have  any  necessary  connection. 
Simplicity  is  frequently  attained  by  keeping  different 
classes  of  entries  in  different  books,  rather  than  by  enter- 
ing many  varied  transactions  in  one  book,  a  method  which 
necessitates  much  analysis  at  a  later  day. 

The  terms  "a  few  records"  and  "simple  methods"  arc 
not  synonymous;  they  are  in  fact  opposed  to  each  other. 
"Few  records"  usually  mean  poor  records,  and  poor  rec- 
ords not  infrequently  result  in  a  poor  owner  of  those  rec- 
ords. In  the  case  of  a  large  real  estate  business  with  nu- 


RECORDS    FOR    REAL    ESTATE  9 

merous  branches  and  much  detail  work,  a  certain  complexity 
is  unavoidable.  It  is  a  condition  common  to  all  affairs  that 
the  larger  and  more  involved  the  business,  the  more  com- 
prehensive and  complex  must  be  its  system  of  records. 

Also  in  any  business,  no  matter  what  its  size,  a  sufficient 
number  of  books  must  be  employed  to  record  properly  its 
transactions,  and  the  accountant  when  installing  a  system, 
usually  finds  that  simplicity  and  clearness  are  obtained  by 
the  use  of  records  sufficient  in  number  to  keep  each  class 
of  entry  separate  and  distinct. 

§  7.    Condensed  Records 

Several  decades  ago  there  was  an  unnecessary  amount 
of  writing  caused  by  the  multiplicity  of  day-books,  the  need- 
less journalizing  of  every  entry,  and  useless  transcriptions 
from  book  to  book.  It  was  discovered  that  much  of  this 
was  duplication,  still  more  was  needless,  and  that  much 
elimination  was  possible.  A  reaction  set  in ;  the  pendulum 
swung  to  the  opposite  extreme,  and  all  kinds  of  condensed 
systems  and  combinations  were  devised,  copyrighted,  and 
patented,  but  have  in  most  cases  been  abandoned.  One 
enterprising  retailer  whose  small  business  allowed  him 
ample  leisure,  even  devised  a  single  book  which  was  to  take 
the  place  of  journal,  cash  book,  and  ledger.  It  required 
no  balancing,  and  in  fact  was  a  whole  accounting  system 
in  itself.  Most  accountants  who  have  audited  such  a  method 
when  applied  to  a  large  concern  and  where  carelessness  has 
existed  in  the  bookkeeping,  will  testify  to  the  troubles  in- 
volved by  such  attempts  at  simplicity.  It  must  not  be  gath- 
ered from  this,  however,  that  columnar  books  are  to  be 
condemned.  On  the  contrary,  they  are  invaluable,  but  they 
must  be  designed  and  used  with  judgment. 

In  considering  the  number  of  records  it  must  be  remem- 
bered that  competent  accounting  calls  for  no  word  and  no 


I0  REAL   ESTATE  ACCOUNTS 

figure  beyond  those  actually  necessary.  Each  transaction 
must  be  entered,  and  be  entered  clearly,  but  no  more  time 
is  required  to  make  these  entries  in  a  properly  designed 
series  of  books  than  to  crowd  them  into  a  single  volume, 
which,  if  the  business  is  large,  must  necessarily  assume 
clumsy  proportions.  Also,  it  is  obvious  that  reference  to  a 
set  of  books  in  which  the  entries  are  properly  classified  and 
displayed  will  be  easier  and  much  more  satisfactory  than 
is  possible  under  the  limitations  of  a  single-volume  system. 


CHAPTER   III 
CORPORATE    RECORDS 

§  8.    Minute  Book 

The  minute  book  is  of  the  first  importance  among  cor- 
porate records,  for  it  is  usually  the  original  and  sole  record 
of  the  proceedings  at  corporate  meetings.  It  also  contains 
copies  of  both  the  charter  and  the  by-laws.  These,  how- 
ever, as  a  rule  are  only  copies  and  could  be  replaced ;  while 
the  minutes  do  not  appear  elsewhere  and  could  not  be  du- 
plicated if  the  minute  book  were  destroyed. 

In  the  case  of  a  real  estate  company  the  minutes  are 
particularly  important,  as  the  business  itself  is  peculiarly 
fertile  in  special  resolutions  and  authorizations.  For  this 
reason  it  is  perhaps  well  to  insert  a  word  of  caution  as  to 
the  use  of  loose-leaf  minute  books.  The  minute  book,  and 
usually  the  minute  book  alone,  contains  the  final  authori- 
zation for  all  important  transactions  approved  by  the  di- 
rectors. Considering  the  probability  of  changes  in  the 
board  of  directors,  and  the  fact  that  the  minutes  are  perhaps 
written  by  different  individuals  at  different  times,  and  that 
it  may  be  necessary  to  refer  to  them  years  after  they  have 
been  made,  the  wisdom  of  confiding  such  important  records 
to  loose  sheets  is  obviously  doubtful,  unless  every  precau- 
tion be  taken  to  prevent  loss,  change,  or  substitution. 

The  loose-leaf  minute  book  has  many  attractions.  It 
is  convenient;  it  enables  minutes  to  be  typewritten;  a  du- 
plicate copy  may  be  made  if  desired;  and  it  presents  a  bet- 
ter appearance  than  the  ordinary  book.  These  advantages, 
however,  do  not  warrant  the  use  of  the  book  so  long  as  any 

II 


I2  REAL   ESTATE   ACCOUNTS 

page  can  easily  be  removed  without  detection,  and  it  should 
not  be  used  unless  it  is  of  a  style  that  makes  removal  or 
substitution  of  leaves  difficult  if  not  impossible.  This  end 
is  sometimes  attained  by  the  use  of  a  special  paper,  each 
page  having  its  proper  folio  number  printed  on ;  sometimes 
by  numbering  and  initialing  the  pages  as  they  are  written ; 
or,  still  more  effectively,  by  watermarking  the  page  num- 
bers or  some  private  emblem  into  the  sheets  when  the  paper 
is  made.  In  the  case  of  the  numbered  pages,  every  sheet 
must  be  accounted  for  and  substitution  or  change  will  be 
quite  as  difficult  as  in  a  bound  book. 

§  9.    Stock  Certificate  Book 

The  form  of  the  stock  certificate  book  and  the  general 
design  of  its  certificates  vary  but  little.  The  matter  appear- 
ing on  the  body  of  the  certificates  is  determined  by  custom 
or  by  the  statutes  of  the  state  in  which  the  corporation  is 
organized.  The  essential  requirements  are  that  each  cer- 
tificate shall  show  the  name  of  the  company,  the  state  in 
which  it  is  incorporated,  the  total  authorized  capital,  the 
name  of  the  owner  of  the  certificate,  the  number  of  shares 
which  the  certificate  represents,  the  value  of  each  share,  the 
nature  of  the  stock — whether  common  or  preferred — and 
the  date  of  issue.  The  certificate  should  also  provide  a 
blank  form  of  transfer  for  the  owner  to  use  when  his  stock 
is  to  be  assigned. 

The  certificates,  which  are  usually  in  a  bound  volume, 
are  numbered  consecutively  and  have  stubs  numbered  to 
correspond.  These  stubs  contain  blanks  for  recording  the 
most  important  data  given  on  the  certificate. 

The  stock  certificate  book  is  usually  kept  by  the  secre- 
tary of  the  corporation.  No  difficulty  is  likely  to  be  en- 
countered in  keeping  it,  provided  the  necessary  entries  are 
made  at  the  time  each  transaction  occurs.  It  is,  however, 


CORPORATE  RECORDS  ^ 

of  the  greatest  importance  that  no  certificate  be  issued  until 
the  essential  facts  have  been  entered  on  its  stub.  When  a 
certificate  is  surrendered  for  reissue,  it  should  be  cancelled 
by  perforation,  by  a  rubber  stamp,  or  by  some  other  method 
equally  effective.  It  should  then  be  pasted  back  on  the 
stub  of  the  stock  certificate  book  from  which  it  was  origin- 
ally torn,  and  there  should  be  entered  on  this  stub  the  num- 
ber of  the  certificate  issued  in  lieu  thereof,  or,  if  none  is 
issued,  the  reason  for  its  surrender. 

These  matters  appear  almost  too  elementary  to  dwell 
upon,  and  yet  a  vast  amount  of  labor  and  trouble  may  be, 
and  frequently  is,  caused  by  the  failure  of  the  secretary  or 
bookkeeper  to  make  the  proper  entries  at  the  proper  time. 

Stock  certificates  are  occasionally  printed  and  kept  loose, 
that  is,  not  attached  to  any  stub  or  bound  in  a  book.  Such 
a  course  is  unwise  and  unsafe. 

§  10.    Stock  Record  or  Stock  Ledger 

This  is  really  a  sub-ledger,  in  which  an  account  is  opened 
with  each  stockholder,  charging  him  with  certificates  is- 
sued to  him  and  crediting  him  with  those  which  he  has 
surrendered.  (See  Form  I.)  Inasmuch  as  the  stubs  in 
the  stock  certificate  book  constitute  a  bound  volume  from 
which  entries  are  made  into  the  stock  ledger,  the  latter  rec- 
ord is  not  t>ne  of  original  entry.  It  is  therefore  safe  and 
entirely  proper  to  use  a  loose-leaf  book  for  this  ledger  with- 
out the  precautions  necessary  in  the  case  of  a  loose-leaf  min- 
ute book.  The  loose-leaf  stock  ledger  is  usually  arranged 
alphabetically,  thereby  saving  all  reference  to  an  index.  If 
the  company  is  a  large  one,  there  is  considerable  advantage 
in  this  alphabetical  arrangement.  In  some  states  the  alpha- 
betical arrangement  is  required  by  law.  The  fact  that  ac- 
counts can  be  removed  as  they  are  closed  is  also  an  impor- 
tant feature  of  the  loose-leaf  ledger. 


REAL    ESTATE   ACCOUNTS 


CORPORATE   RECORDS  15 

§  ii.    Subscription  Ledger 

This  book  is  needed  only  where  capital  stock  is  not  paid 
for  immediately  upon  subscription.  In  it,  an  account  is 
opened  for  each  subscriber  for  stock,  showing  his  name  and 
address,  the  amount  of  his  subscription,  and  the  terms  of 
payment.  The  subscriber's  account  is  charged  with  the 
amount  of  his  subscription,  and  credited  with  the  payments 
thereon  as  they  are  made.  When  the  subscription  is  com- 
pleted the  account  is  closed.  Inasmuch  as  this  is  merely  a 
sub-record,  the  entries  for  which  are  taken  from  the  jour- 
nal and  the  cash  book,  the  loose-leaf  ledger  is  convenient 
and  unobjectionable.  The  subscription  ledger  corresponds 
to  the  English  record  known  as  the  "call  book,"  in  which 
is  recorded  each  call  made  for  unpaid  capital  subscribed. 

The  debit  entries  to  the  subscription  ledger  are  posted 
from  the  journal,  where  the  entry  is  usually  made  in  the 
following  form : 


Subscription  Account 

To  Capital  Stock  Account 

For  the  following  subscriptions  to  stock : 
John  Brown,  5  shares,  $500,  payable 


James  Smith,  10  shares,  $1,000,  payable 


The  credit  entries  to  the  subscription  ledger  are  usually 
posted  from  the  cash  book  as  payments  are  made,  although 
occasionally  a  journal  entry  is  required  when  some  consid- 
eration other  than  cash  is  received  for  capital  stock  or  when 
subscriptions  are  cancelled. 


CHAPTER   IV 

GENERAL    BOOKS    OF    ACCOUNT 

§  12.    General  Receipt  Book 

It  is  essential  that  every  item  of  cash  received  should  be 
immediately  entered  on  the  records,  and  the  best  method 
of  accomplishing  this  is  to  use  a  receipt  book  in  which  the 
receipts  are  numbered  consecutively  in  duplicate,  the  sec- 
ond copy  being  made  out  at  the  same  time  as  the  original 
by  means  of  carbon  paper.  There  can  be  no  doubt  that 
the  carbon  duplicate  in  such  book  is  far  better  than  the  re- 
ceipt stub.  Not  only  does  it  save  time  but  it  gives  an  ab- 
solute duplication  of  the  receipt  delivered  to  the  party  mak- 
ing the  payment. 

The  original  of  each  receipt  in  the  general  receipt  book 
is  perforated  so  that  on  being  made  out  it  can  be  torn  from 
the  book  and  given  to  the  payer,  the  duplicate  (preferably 
on  colored  paper)  remaining  in  the  book.  The  receipt  book 
then  forms  the  book  of  original  entry,  on  which  all  sub- 
sequent entries  relating  to  cash  received  are  based.  This 
book  takes  the  place  of  a  cash  "blotter"  or  counter  book  for 
receipts,  and  in  the  temporary  absence  of  the  regular  cashier 
provides  his  substitute  with  a  convenient  and  reliable  means 
of  accounting  for  all  money  he  may  receive. 

It  is  a  good  rule,  and  in  large  offices  an  essential  one, 
that  all  receipt  books  shall  be  kept  by  the  cashier  or  other 
responsible  officer  under  lock  and  key,  and  that  new  books 
be  issued  to  collectors  and  others  only  as  the  old  books  are 
returned.  A  written  record  should  be  kept  of  the  date  of 
issue  of  each  book  and  the  name  of  the  person  receiving  it. 

16 


GENERAL   BOOKS   OF  ACCOUNT  17 

It  is  convenient  to  paste  on  the  back  of  each  book  its  num- 
ber, and  the  first  and  last  dates  of  all  the  receipts  it  con- 
tains. 

The  used  receipt  books  must  be  filed  with  care,  for  in 
the  event  of  a  controversy  over  any  payment  they  are,  as 
books  of  original  entry,  of  even  more  value  than  the  cash 
book  itself. 


THE   ALPHA   LAND   COMPANY 
NOCATEE,  GEORGIA 


No.  72457 
Received  of 
Address 


The  sum  of 


ON  ACCOUNT  OF 

Mortgage  No  .............  Principal  ....................  $ 

Interest  .....................  $ 

Contract  No  ...........................................  $ 

Eureka  Gardens  .......................................  $ 

Fairmount  ............................................  $ 

Grandville  ............................................  $ 

Kingslake  ........................................  ....  $ 

Ladore  ...............................................  $ 


$ 
THE  ALPHA  LAND  COMPANY, 

By 
(This  receipt  made  in  duplicate) 

Form  2.    General  Receipt  Book 


xg  REAL   ESTATE  ACCOUNTS 

The  form  of  receipt  book  shown  in  Form  2  has  been 
in  actual  use  for  a  number  of  years  and  meets  every  gen- 
eral requirement.  Receipts  for  rents  are  given  on  a  dif- 
ferent form. 

Speaking  generally,  every  penny  of  cash  received  should 
be  accounted  for  on  a  receipt.  In  practice  there  arise  a 
few  exceptions  to  this  rule,  as  for  instance,  proceeds  of  dis- 
counted notes,  proceeds  of  bills  payable  and  of  mortgages 
and  bonds  sold.  Even  in  such  cases  it  is,  when  possible, 
usually  advisable  to  fill  out  a  receipt  showing  the  details, 
although  the  original  receipt  is  not  necessarily  delivered  to 
the  person  from  whom  the  money  is  received. 

§  13.    Cash  Book 

In  modern  practice  it  is  customary  to  speak  of  the  cash 
book  as  distinct  from  the  journal,  and  this  naturally  leads 
those  unfamiliar  with  bookkeeping  to  think  that  some  radi- 
cal difference  exists  between  the  two  books.  This,  however, 
is  not  the  case,  for  a  cash  book  is  neither  more  nor  less 
than  a  special  form  of  journal  devoted  to  cash  entries,  and 
might,  therefore,  properly  be  called  a  cash  journal,  just  as 
a  journal  devoted  to  sales  entries  is  called  a  sales  journal. 

In  practice,  the  term  "Cash  Journal"  is  usually  re- 
stricted to  the  columnar  form  of  cash  book,  an  example  of 
which  is  shown  in  Form  3.  The  use  of  this  name  has  caused 
some  confusion  and  has  sometimes  been  made  an  excuse 
for  bringing  into  this  record  items  which  do  not  refer  to 
cash.  Considered  in  the  light  of  accounting  history,  this 
practice  is  a  step  backward  rather  than  forward.  Our  fore- 
fathers brought  the  record  of  all  their  transactions  into  one 
book — a  journal,  i.e.,  a  "day-book" — from  which  they 
posted  to  the  ledger;  but  after  years,  centuries  in  fact,  it 
was  found  advantageous  to  eliminate  cash  items  from  the 
journal  and  record  them  in  a  cash  book.  This  idea  has 


GENERAL  BOOKS  OF  ACCOUNT 


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CASH  DISBURSEMENTS 

INTERESTS  II 
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20  REAL   ESTATE  ACCOUNTS 

been  further  developed  and  expanded  until  today  we  find 
cash  journals,  sales  journals,  purchase  journals,  and  many 
others.  It  should  be  observed,  however,  that  all  such  books 
have  one  aim  in  common,  namely,  to  start  the  work  of 
analysis  as  entries  are  made,  and  thus  segregate  each  dis- 
tinct class  of  entry  in  an  appropriate  record.  Whenever  a 
departure  is  made  from  this  principle  and  entries  relating 
to  all  kinds  of  transactions  are  crowded  into  one  record,  we 
are  clearly  returning  to  those  methods  which  science  and 
experience  have  taught  us  should  be  abandoned. 

The  actual  form  of  cash  book  used  in  any  particular  in- 
stance must  depend  upon  the  nature  of  the  business.  There 
are,  however,  a  few  rules  which  apply  in  almost  all  cases. 
One  of  these  requires  that  the  cash  book  be  a  bound  book 
and  not  of  the  loose-leaf  form.  A  dishonest  cashier  may,  of 
course,  make  changes  in  a  bound  book,  but  it  presents  more 
difficulties  than  a  loose-leaf  book,  and  gives  the  auditor  a 
far  better  opportunity  of  discovering  any  irregularity  and1 
particularly  any  carelessness  on  the  part  of  the  cashier 
which  may  have  occurred. 

There  is  one  exception  to  the  rule  above  mentioned, 
which  applies  to  a  concern  that  has  two  offices  at  different 
points,  as  for  example,  an  English  concern  which  operates 
both  in  England  and  in  the  United  States.  In  such  a  case 
the  home  office  frequently  desires  a  monthly  transcript  of 
the  cash  book,  and  it  is  then  entirely  proper  to  have  the  cash 
book  in  loose-leaf  form,  arranged  with  duplicate  pages, 
printed  on  thin  paper,  and  ruled  on  one  side  only,  so  that 
by  the  use  of  carbon  paper  the  alternate  sheets  give  a  copy 
of  the  original  writing.  This  is  easily  secured  by  the  use 
of  the  typewriter  or  of  a  hard  pen,  and  it  saves  the  labor 
of  rewriting  the  entire  cash  book.  At  the  end  of  each  month 
the  duplicate  sheets  are  taken  out  and  sent  to  the  home  of- 
fice. They  then  pass  beyond  the  control  of  the  bookkeeper, 


GENERAL   BOOKS   OF  ACCOUNT  2I 

and  should  any  question  involving  them  arise  in  the  future, 
they  are  always  at  hand  for  reference. 

Another  general  essential  for  the  cash  book  is  the  use 
of  special  columns.  It  is  almost  invariably  found  that  such 
a  book  is  most  convenient  for  the  bookkeeper,  the  manage- 
ment, and  the  auditors.  The  number  of  columns  depends, 
of  course,  upon  the  nature  of  the  business,  the  main  point 
being  that  every  account  which  is  used  often  should  have  a 
column  allotted  to  it,  as  indicated  in  Form  3. 

In  the  case  of  a  large  company  handling  a  considerable 
number  of  active  subdivisions,  it  is  often  convenient  to  have 
a  cash  book  containing  forty  or  fifty  columns.  It  is  then 
advisable  to  enter  the  receipts  in  one  volume  and  the  pay- 
ments in  another — an  arrangement  which  presents  many 
advantages,  as  two  bookkeepers  can  work  on  the  books  at 
the  same  time,  and  the  auditors  can  examine  one  volume 
without  interfering  with  work  on  the  other. 

The  cash  book  should  be  written  up  and  balanced  each 
day,  the  debit  side  being  entered  from  the  receipt  books, 
and  the  credit  side  from  the  check  stubs,  check  register,  or 
voucher  list. 

The  rule  that  all  incoming  cash  items  be  entered  at  least 
daily,  should  be  invariably  observed,  and  the  total  cash  re- 
ceived should  be  deposited  in  the  bank  each  day.  In  this 
way  the  cashier  is  at  once  relieved  of  all  further  responsi- 
bility as  to  the  custody  of  that  particular  cash,  and  the 
auditor  can  very  quickly  check  each  day's  receipts  with  the 
amount  shown  in  the  bank  pass-book.  This  is  probably  the 
most  important  of  all  rules  for  the  keeping  of  cash  books. 

On  the  credit  side  of  the  cash  book  are  entered  the  dis- 
bursements, all  of  which  should  be  made  by  check.  Small 
items  are  paid  out  of  the  petty  cash,  which  is  described 
in  §  14. 

When  such  a  cash  book  as  is  shown  in  Form  3  is  used, 


22  REAL   ESTATE  ACCOUNTS 

each  of  the  bank  accounts  is  kept  in  it,  and  no  cash  or  bank 
accounts  need  be  kept  in  the  ledger  (except  occasional  or 
special  bank  accounts  outside  the  usual  current  business), 
the  cash  book  balance  being  carried  direct  to  the  trial  bal- 
ance. A  fastidious  bookkeeper  may  claim  that  the  ledger 
should  show  each  and  every  account,  and  for  the  sake  of 
completeness  may  add  a  cash  account  to  his  ledger,  the  total 
receipts  and  disbursements  being  posted  once  a  month.  Such 
a  ledger  account  has  the  advantage  of  furnishing  a  state- 
ment of  monthly  receipts  and  disbursements,  which  is  some- 
times of  value. 

It  may  be  noted  that  one  of  the  chief  objects  in  having 
the  bank  column  in  the  cash  book  is  to  avoid  the  necessity 
for  a  check  register.  With  the  cash  book  so  arranged,  and 
a  good  system  of  voucher  checks,  either  in  duplicate  or  with 
stubs,  the  register  may  safely  be  dispensed  with. 

It  is  not  an  uncommon  practice  for  agents  who  sell  prop- 
erties, especially  subdivision  properties,  to  deduct  their  com- 
missions from  the  remittances  they  make  to  the  home  office. 
In  an  office  where  many  such  transactions  occur,  it  is  con- 
venient to  use  a  column  on  the  debit  side  of  the  cash  book 
in  which  to  write  such  deducted  commissions.  If  this  is 
done,  the  two  amounts  —  cash  received  and  commissions  — 
should  be  credited  to  the  customer;  and  at  the  end  of  the 
month  the  total  of  the  commission  column  must  be  treated 
as  a  journal  entry  and  debited  to  Commission  account,  being 
omitted,  of  course,  from  the  cash  book  totals  of  receipts. 
This  method  is  similar  to  that  followed  by  many  mercantile 
houses  in  connection  with  the  discounts  allowed  to  cus- 
tomers. 

It  is  a  better  practice  to  have  the  agent  remit  his  col- 
lections in  full  and  receive  a  check  for  his  commissions ;  but 
the  enforcement  of  such  a  rule  in  face  of  an  established  prac- 
tice might  handicap  the  selling  force. 


GENERAL   BOOKS   OF  ACCOUNT 


§  14.    Petty  Cash  Book 

As  already  stated,  all  payments  entered  in  the  general 
cash  book  must  be  made  by  check,  and  as  in  every  office 
there  are  sundry  disbursements  too  small  to  justify  sep- 
arate checks,  some  proper  means  of  making  these  must  be 
provided. 

The  usual  and  proper  method  of  handling  such  pay- 
ments is  through  a  petty  cash  account  maintained  on  the  im- 


PETTY  CASH 

DATE 

NAME 

EXPENSE 

REPAIRS 

COM- 
MISSIONS 

POSTAGE 

ADVER- 
TISING 

MISCEL. 

TOTALS-  MISCEL. 

ADVERTISING 

$ 

POSTAGE 

$ 

COMMISSIONS 

$ 

REPAIRS 

$ 

EXPENSE 

$ 

GRAND  TOTAL-miD  BY  CHECK 

K)  

$ 

Form  4.    Petty  Cash  Book 

prest  system.  The  method  of  keeping  this  is  simple.  To 
open  the  account,  a  check  for  a  round  sum  sufficient  to  care 
for  such  expenditures  for  a  month  or  other  convenient 
period,  is  given  to  the  cashier  and  is  charged  on  the  gen- 
eral ledger  to  "Petty  Cash"  or  "Imprest  Fund."  This 
ledger  account  remains  unchanged  unless  the  amount  of  the 
fund  in  the  hands  of  the  cashier  be  increased  or  diminished. 


24  REAL    ESTATE   ACCOUNTS 

This  is  so  because,  as  explained  later,  subsequent  checks 
drawn  to  replenish  petty  cash  are  not  debited  to  Petty  Cash 
account,  but  are  charged  directly  to  the  various  accounts  for 
which  the  petty  cash  funds  have  been  expended. 

From  this  petty  cash  fund  the  cashier  makes  such  pay- 
ments as  are  necessary,  recording  each  one  in  a  book  similar 
to  that  shown  in  Form  4.  Before  the  entire  amount  is  ex- 
pended, he  casts  up  each  of  the  columns  and  finds  the  total 
of  his  expenditures;  a  check  is  then  drawn  for  this  exact 
amount,  and  the  cashier  again  has  the  original  sum  with 
which  he  started  and  can  repeat  the  whole  process.  The 
check  itself  is  entered  on  the  cash  book  and  divided  among 
the  various  accounts  to  which  it  is  chargeable,  as  shown  by 
the  columns  of  the  petty  cash  book. 

It  will  be  noticed  that  Form  4  differs  from  the  usual 
form  of  cash  book  in  that  it  records  disbursements  only. 
This  is  owing  to  the  fact  that  after  the  initial  check  is 
drawn  for  petty  cash,  each  succeeding  check  is  for  the  exact 
amount  of  the  expenditures  up  to  a  given  point,  and  when- 
ever petty  cash  is  thus  replenished  by  a  check  from  the 
general  cash  account,  the  petty  cash  book  is  ruled  off  and  a 
notation  made,  substantially  as  follows : 

Total  Disbursements $ 

Covered  by 
Check  No..  Date.. 


The  distribution  headings  shown  on  Form  4  are  not 
printed  as  their  position  cannot  be  determined  in  advance, 
but  are  written  in  whenever  the  columns  are  totaled. 

It  is  an  excellent  practice  to  provide  the  cashier  with 
petty  cash  vouchers,  as  shown  in  Form  5,  printed  on  inex- 
pensive paper  and  bound  in  pads  in  the  same  manner  as 
are  the  debit  and  credit  slips  in  a  bank.  The  used  vouch- 
ers can  be  filed  in  bundles,  each  one  of  which  should  repre- 


GENERAL    BOOKS    OF   ACCOUNT  25 

sent  the  disbursements  covered  by  one  of  the  checks  from 
the  general  account. 


AJAX   LAND   COMPANY 
PETTY  CASH 
VOUCHER 

JORDAN,  N.  C, 191 .  . 

Received  of  the  Cashier 

Dollars 

For    . 


Form  5.    Petty  Cash  Voucher 

§  15.    Superintendent's  Cash  Book 

It  is  frequently  desirable  that  a  superintendent  or  resi- 
dent manager  whose  headquarters  are  distant  from  the  head 
office,  be  furnished  with  funds  to  meet  current  expenses. 
If  the  amounts  he  expends  are  large,  he  should  make  his 
payments  by  means  of  checks  on  a  special  bank  account. 
If  they  are  small,  he  may  make  them  in  currency,  as  sug- 
gested in  connection  with  the  management  of  petty  cash. 

A  superintendent's  account  should  be  kept,  as  far  as 
circumstances  permit,  on  precisely  the  same  lines  as  the 
cashier's  petty  cash,  and  a  similar  record  is  therefore  ap- 
propriate. Inasmuch  as  the  superintendent  must  render  to 
the  chief  office  a  report  of  his  transactions,  it  is  convenient 
to  have  his  book  printed  with  the  alternate  leaves  perforated 
so  that  they  may  be  detached ;  and  by  means  of  carbon  pa- 
per, those  sheets  remaining  in  the  book  can  be  made  to 
show  a  copy  of  each  report  sent  to  the  head  office.  Experi- 
ence has  shown  that  unless  some  such  method  is  followed, 


26 


REAL    ESTATE   ACCOUNTS 


the  cash  account  of  the  superintendent  may  easily  become 
confused  and  thereby  entail  the  waste  of  much  time. 

Whatever  system  be  followed  for  recording  the  dis- 
bursements of  a  superintendent  or  resident  manager,  it  will 
be  found  wise  to  establish  the  rule  that  any  collections  he 
makes  must  invariably  be  remitted  intact  to  the  main  of- 
fice, and  never  allowed  to  become  a  part  of,  or  to  be  in- 


REPORT  Or  CASH  & 

BV  THE  SUPERINTENDENT  / 

DECEIVED  AND  EXPENDED 

*T 

DATE 

RECEIVED 

AMOUNT 

DATE 

EXPENDED 

VO.NO 

AMOUNT 

TOTAL  RECEIPTS 
SUBMITTED  HEREWITH 

TOTAL  EXPENDITURES 
PER  VOUCHERS  HEREWITH 

TO  BE  CREDITED  TO' 

TO  BE  CHARGED  AS  fOLLOWS' 

Form  6.    Superintendent's  Cash  Book 

eluded  in,  his  petty  cash;  for  if  they  are,  the  necessity  for 
journal  entries  will  arise,  whereas  all  these  cash  transac- 
tions should  be  recorded  on  cash  books. 

When  a  superintendent  receives  and  disburses  cash,  as 
already  suggested,  a  uniform  style  of  report  (Form  6) 
should  be  adopted.  This,  as  stated,  should  be  arranged  so 
as  to  provide,  by  means  of  carbon  copies,  an  original  for 


GENERAL   BOOKS   OF  ACCOUNT  27 

transmission  to  the  principal  office  and  a  duplicate  to  be 
retained  by  the  superintendent. 

§  1 6.    Journal 

Inasmuch  as  the  journal  is  a  book  of  original  entry,  and 
contains  entries  vitally  affecting  nearly  all  sales  and  pur- 
chases, the  book  should  be  permanently  bound  and  not  of 
the  loose-leaf  form.  The  number  of  columns  must  depend 
somewhat  upon  the  requirements  of  the  particular  case,  but 
as  a  rule  at  least  four  columns  should  be  provided,  and  fre- 
quently it  is  a  convenience  to  have  six  or  more  columns.  In 
connection  with  the  accounts  for  subdivision  properties,  the 
columnar  form  of  journal  presents  advantages  so  great  as 
to  render  it  practically  indispensable  for  the  proper  entry 
of  contracts  and  the  entries  relating  to  the  cancellation 
thereof. 

It  is  a  common  practice  in  offices  handling  such  proper- 
ties, to  reserve  in  the  journal  on  the  first  of  each  month  a 
page  or  other  appropriate  space  for  each  subdivision,  in- 
serting merely  the  heading,  e.g. : 


Kingslake  Contracts 

To  Kingslake  Purchase. 
"    Kingslake  Gain 


From  time  to  time  during  the  month,  as  contracts  are 
made,  they  are  entered  in  columnar  form,  as  follows: 

Contracts  Purchase  Gain 

Dr.             Cr.  Cr. 

J.   Doe,   ^182      $250.00      $200.00  $50.00 

R.  Roe,      183        500.00        400.00  100.00 

At  the  end  of  the  month  these  columns  are  added  and 
the  totals  inserted  in  the  headings. 


2g  REAL    ESTATE   ACCOUNTS 

In  the  case  of  cancellations  the  form  of  entry  may  be: 


Real  Estate 

Gain 

To  Contracts 

"    Cancellation  Profits. 


In  this  case,  four  columns  would  be  required. 

It  is  obvious  that  this  form  of  entry  requires  less  labor, 
and  gives  a  record  better  adapted  to  quick  reference,  than 
if  each  contract  were  made  the  subject  of  a  distinct  journal 
entry. 

§  17.    General  Ledger 

Inasmuch  as  in  a  properly  designed  system  the  number 
of  accounts  in  the  general  ledger  is  small  compared  with 
the  total  number  of  accounts,  a  bound  book  can  often  be 
conveniently  used.  In  the  case  of  a  large  concern  it  is,  how- 
ever, usually  advisable  to  use  a  loose-leaf  book,  particularly 
as  certain  accounts  contain  numerous  items  and  it  is  almost 
impossible  to  predict  how  many  folios  they  will  cover. 

The  loose-leaf  ledger  is  no  more  likely  to  lead  to  errors 
of  carelessness  than  a  bound  book,  and  any  bookkeeper 
capable  of  wilfully  falsifying  his  books  could  do  so  with 
almost  equal  ease  under  either  system.  In  many  offices 
efficient  safeguards  can  be  provided  by  a  properly  arranged 
system  of  internal  checking,  the  ledgers  and  cash  books  being 
kept  by  different  bookkeepers  who  are  occasionally  changed 
from  one  book  to  another.  An  additional  security  is  fur- 
nished when  each  sheet  is  initialed  by  an  officer  of  the  con- 
cern at  the  time  the  account  is  opened,  and  the  rule  enforced 
that  no  sheet  may  be  removed  until  again  initialed.  If  the 
books  are  subject  to  the  audit  of  an  accountant,  the  periodic 
initialing  of  balances  and  checking  of  items  render  any 
substitution  still  more  difficult. 

Whichever  style  of  book  is  chosen,  the  ledger  shown  in 


GENERAL  BOOKS  OF  ACCOUNT 


Form  7,  which  differs  somewhat  from  that  generally  used, 
is  strongly  recommended.  This  form  of  ledger  greatly  aids 
in  the  preparation  of  monthly  trial  balances,  and  also  facili- 
tates the  analysis  of  any  account  at  any  time. 

In  real  estate  accounts  particularly,  it  is  often  desirable 


LADORE  EXPENSE 

= 

WTE. 

ITEMS 

MONTHS 
TOTAL5 

DATE 

fTEMS 

MONTHLY 
TOTALS 

Jql 
fab 

l> 

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k) 

Form  7.     General  Ledger 

to  find  out  how  the  monthly  sales  of  some  one  subdivision 
have  been  running  during  a  given  period,  and  a  glance  at 
such  a  ledger  shows  this  without  further  calculation.  In 
a  concern  doing  a  large  business,  there  is  frequently  a 
very  short  interval  between  the  closing  of  the  books  and 
the  preparation  of  the  annual  report,  while  at  the  same  time 
there  is  an  unusual  amount  of  work  in  connection  with  the 
calculation  of  realized  profits.  Every  hour  saved  in  such 
work  is  of  great  value,  and  the  advantages  of  this  form  of 
ledger  are  then  manifest. 


CHAPTER  V 

SUB-LEDGERS 

§  1 8.    Mortgages  Receivable  Ledger 

This  is  a  sub-ledger  intended  to  show  all  the  particulars 
of  every  mortgage  held  by  the  concern.  (See  Form  8.) 
It  is  of  minor  consequence  whether  it  be  a  bound  book  or 
a  loose-leaf  ledger,  as  the  mortgages  may  be  entered  in  the 
order  of  their  serial  numbers.  The  form  of  ruling  adopted 
in  either  case  should  provide  for  the  exhibition  of  the  fol- 
lowing facts: 

Serial  number  of  mortgage;  name  of  mortgagor;  de- 
scription of  property  and  serial  property  number;  amount 
of  mortgage ;  date  made ;  date  due ;  value  of  security ;  rate  of 
interest ;  dates  when  interest  falls  due ;  amount  of  insurance 
to  be  carried;  details  of  notes  —  number,  due  dates, 
etc. ;  particulars  of  the  recordation  of  the  mortgage ;  profit. 

Rulings  should  also  be  provided  for  a  "Principal"  ac- 
count and  for  "Interest  and  Charges." 

The  mortgages  receivable  book  shown  in  Form  8  meets 
the  above  requirements,  and  in  connection  with  the  property 
ledger  gives  all  necessary  information  regarding  mortgages 
receivable. 

As  soon  as  a  mortgage  receivable  —  that  is,  a  mortgage 
given  to  or  acquired  by  the  concern  —  is  executed  and  de- 
livered, it  should  be  entered  in  this  book  under  the  first 
vacant  serial  number.  For  instance,  if  the  first  of  such 
mortgages  were  made  by  Alfred  Jones,  it  would  be  known 
in  the  accounts  as  "Mortgage  Receivable  No.  i — Jones." 

Inasmuch  as  precedence  among  several  liens  upon  the 

30 


UJ 
CO 

g 

UJ 

o 

LU 
CC 

UJ 


UJ 


(T)  CL- 
OD O 


SUB-LEDGERS 


<-D 
g 


o 

C_J 


UJ 

or 


22  REAL   ESTATE  ACCOUNTS 

same  piece  of  property  may  depend  very  largely,  if  not  en- 
tirely, upon  the  dates  of  their  respective  recordation,  no 
time  should  be  lost  in  sending  each  mortgage  received  to 
the  proper  recording  officer ;  and  when  this  is  done  a  pencil 
memorandum  of  the  fact  should  be  made  on  the  mortgages 
receivable  ledger.  When  the  mortgage  is  returned,  the  full 
particulars  of  its  recordation  should  be  entered  in  this  ledger 
and  the  mortgage  itself  should  be  filed  in  its  proper  place. 

In  the  mortgages  receivable  ledger,  each  Principal  ac- 
count is  debited  with  the  original  amount  of  the  loan  and 
credited  with  each  payment  on  account  of  principal  as  it  is 
made.  The  total  balances  of  these  columns  of  the  sub-ledger 
must  therefore  agree  with  the  balance  of  the  Mortgages 
Receivable  account  in  the  general  ledger. 

It  is  frequently  convenient  in  determining  action  re- 
garding mortgages  (for  instance,  when  a  mortgage  is  in 
arrears),  to  know  the  amount  of  profit  in  the  original  trans- 
action. A  place  for  this  information  is  therefore  provided 
in  the  mortgages  receivable  ledger  under  the  heading  "Re- 
serve," this  saving  reference  to  the  journal  or  other  book 
in  which  the  amount  is  recorded  in  the  ordinary  routine. 

The  Interest  and  Charges  account  of  each  mortgage  is 
debited  in  the  mortgages  receivable  ledger  with  interest  as 
it  falls  due,  and  also  with  all  expenditures  for  taxes,  in- 
surance, paving  assessments,  etc.,  paid  by  the  concern  but 
which  are  to  be  repaid  by  the  mortgagor.  The  account  is 
credited  with  money  received  from  the  mortgagor,  or  from 
other  sources,  in  payment  of  these  charges. 

The  total  balance  of  the  Interest  and  Charges  account 
of  the  mortgages  receivable  ledger  must  equal  the  sum  of 
the  balances  in  the  general  ledger  under  the  accounts  Over- 
due Mortgage  Interest  Receivable,  Mortgage  Taxes,  Mort- 
gage Insurance,  Mortgage  Assessments,  etc. 

If  it  is  intended  that  the  lending  of  money  on  mortgage 


SUB-LEDGERS  33 

shall  form  a  distinct  branch  of  the  business,  proper  forms 
of  application  and  forms  for  reports  of  valuers  and  inspec- 
tors should  be  provided.  Properly  speaking,  these  are  not 
accounting  forms  and  therefore  are  not  discussed  further 
in  this  volume. 

§  19.    Mortgages  Payable  Ledger 

This  is  a  sub-ledger  somewhat  similar  to  that  just  de- 
scribed, but  containing  the  particulars  of  all  mortgages  (en- 
tered in  numerical  order)  which  are  payable  by  the  concern. 

A  special  form  of  ruling  is  required  in  order  to  show 
clearly  the  following  facts  : 

Serial  number  of  mortgage;  name  of  the  mortgagee  or 
his  assignee;  description  of  the  property,  with  serial  prop- 
erty number ;  amount  of  mortgage ;  date  of  mortgage ;  date 
due;  value  of  security;  rate  of  interest;  dates  when  interest 
falls  due ;  insurance  called  for  by  the  mortgage ;  particulars 
of  the  recordation  of  the  mortgage.  (See  Form  9.) 

Provision  must  also  be  made  for  keeping  separately  the 
Principal  account  and  the  Interest  account,  as  in  Form  8. 

Where  mortgages  are  made  by  the  concern,  all  this  in- 
formation can  be  obtained  direct  from  the  original  papers 
before  they  are  delivered  to  the  mortgagee.  It  is  frequently 
the  case,  however,  that  mortgages  payable  are  assumed  by 
the  concern  as  a  part  of  the  purchase  price  for  property  ac- 
quired, and  in  such  cases  abstracts  of  title  must  be  relied 
upon  for  this  information,  which  is  to  be  checked  against 
the  statements  of  the  mortgagors.  (See  §§  52,  53.) 

In  the  mortgages  payable  ledger  the  Principal  accounts 
are  credited  with  the  amounts  of  the  respective  mortgages 
and  are  debited  with  payments  made  on  account  of  the 
principal.  The  total  of  the  balances  must  agree  with  the 
balance  of  the  Mortgages  Payable  account  in  the  general 
ledger. 


34 


REAL   ESTATE  ACCOUNTS 


at 


fc- 


UJ 


LL) 


SUB-LEDGERS 


35 


It  will  usually  be  found  that  entries  to  the  Interest  ac- 
counts of  mortgages  payable  relate  solely  to  interest,  and 
do  not  include  such  a  variety  of  entries  as  appear  in  the 
corresponding  accounts  in  the  mortgages  receivable  ledger. 
This  being  so,  the  total  balances  of  the  Interest  accounts  will 
agree  with  the  balance  of  the  Overdue  Mortgage  Interest 
Payable  account  in  the  general  ledger. 


HELD  BY. 


MORTGAGE  PAYABLE  NO. 
PROPERTY  N0._ 


PRINCIPAL 


INTEREST 


Form  10.    Ordinary  Ledger  Ruling  Adapted  to  Mortgages 
Payable  Ledger 

In  the  event  that  it  is  not  desired  to  have  so  complete  a 
record  as  Form  9  provides,  a  substitute  may  be  arranged 
in  any  ledger-ruled  book  as  indicated  on  Form  10;  but  if 
there  is  a  great  number  of  these  mortgages,  the  more  com- 
prehensive form  should  be  adopted.  In  passing,  it  may  be 
well  to  mention  that  unusual  liabilities  are  often  incurred  in 
connection  with  mortgages  payable,  and  that  the  execution 


36  REAL   ESTATE  ACCOUNTS 

or  assumption  of  all  such  instruments  should  be  authorized 
by  the  board  of  directors  or  other  proper  authority,  the  en- 
tries of  which  in  the  minutes  may  be  compared  with  the 
entries  in  the  ledger.  The  general  subject  of  mortgages 
payable  is  discussed  further  in  §  52  et  seq. 

§  20.    General  Contracts  Ledger 

The  sub-ledger  known  as  the  "General  Contracts 
Ledger"  should  contain  particulars  of  all  those  sales  with 
deferred  payments  not  secured  by  mortgage  which  do  not 
belong  to  any  special  subdivision  and  which  are  known  in 
this  book  as  "general  contracts." 

The  accounts  in  this  sub-ledger  may  be  arranged  either 
alphabetically  or  numerically.  The  latter  method  is  doubt- 
less preferable,  as  it  provides  for  a  chronological  arrange- 
ment and  is  uniform  with  the  plan  suggested  for  the  mort- 
gage ledgers.  This  method  necessitates  the  use  of  an  ac- 
companying index,  but  as  the  employees  usually  designate 
transactions  by  their  book  numbers,  reference  to  the  index 
is  seldom  necessary.  If  the  alphabetical  arrangement  is  se- 
lected, a  loose-leaf  form  of  book  is  necessary;  but  for  the 
numerical  order  either  a  bound  or  loose-leaf  form  can  be 
used,  the  latter  being  preferable. 

The  legal  papers  in  connection  with  such  sales  vary  con- 
siderably in  form;  but  whether  known  as  leases,  bonds  for 
title,  or  similar  name,  they  can  be  best  considered  for  ac- 
counting purposes  under  a  single  head  such  as  "Con- 
tracts." 

The  general  subject  of  contracts  will  be  dealt  with  later 
(Chapter  XVII),  and  at  this  point  it  is  sufficient  merely  to 
enumerate  the  various  items  of  information  which  should 
appear  on  the  general  contracts  ledger.  It  is  better,  as  a 
rule,  to  keep  only  one  account  for  each  contract,  and  to  let 
that  include  the  principal,  interest,  taxes,  and  all  other 


SUB-LEDGERS  37 

charges  which  must  be  paid  by  the  purchaser  before  obtain- 
ing a  conveyance  of  the  title  to  the  property  which  he  has 
purchased. 

The  general  contracts  ledger,  as  will  be  seen  by  refer- 
ence to  Form  n  shown  on  page  38,  provides  for  the  fol- 
lowing particulars: 

1.  Serial  number  of  the  contract. 

2.  Name  of  the  purchaser. 

3.  Original  amount,  being  the  total  purchase  price. 

4.  Amount  of  the  first  payment  (which  is  frequently 

considerably  more  than  any  of  the  subsequent 
periodic  payments). 

5.  Amount   of   subsequent   payments   and   their  due 

dates. 

6.  Date  of  the  contract. 

7.  Term  of  the  contract    (the  number  of  years  for 

which  it  is  to  run). 

8.  Rate  of  interest. 

9.  Dates  when  interest  is  to  be  calculated.     (It  is  also 

well  to  note  the  date  when  the  interest  is  pay- 
able, as  it  may  be  payable  at  fixed  periods  or  it 
may  be  covered  by  the  regular  periodic  pay- 
ments.) 

10.  Street  address  of  buildings  on  the  property. 

11.  Amount  of  insurance  called  for  by  the  contract. 

12.  Description  of  the  property,  with  serial  property 

number. 

13.  Profit. 

14.  Reserve. 

Speaking  generally,  it  is  not  the  business  of  the  vendor 
to  see  that  contracts  are  placed  on  record;  still,  there  is 
plenty  of  space  in  the  heading  of  the  ledger  sheet  shown  in 
Form  1 1  to  insert  any  notation  which  it  may  be  desired  to 


REAL   ESTATE   ACCOUNTS 


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m 


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SUB-LEDGERS  39 

make  should  the  purchaser  have  caused  his  agreement  to  be 
recorded. 

In  practically  all  cases  contracts  are  brought  onto  the 
books  of  account  through  the  journal.  The  amount  of  the 
original  payment  is  in  each  case  posted  to  the  debit  of  its 
proper  account  in  this  sub-ledger,  as  are  all  subsequent  pay- 
ments for  taxes,  etc.,  made  by  the  vendor,  and  all  charges 
for  interest;  while  money  received  on  account  of  any  con- 
tract, whether  for  principal  or  for  interest,  is  posted  to  the 
credit  of  the  appropriate  account.  The  total  of  the  bal- 
ances of  the  general  contracts  ledger  will  therefore  agree 
with  the  balance  of  the  Contracts  account  in  the  general 
ledger. 

The  four  principal  forms  of  sub-ledger,  viz.,  Mortgages 
Receivable,  Mortgages  Payable,  Contracts,  and  Property, 
should  be  of  uniform  size,  not  only  as  a  matter  of  general 
convenience,  but  in  order  that  when  desired  they  may  all 
be  kept  in  one  set  of  covers,  each  sub-ledger  under  its  own 
index. 

§  21.    Commissions  Payable  Ledger 

One  of  the  minor  difficulties  sometimes  encountered 
in  a  real  estate  office  is  the  keeping  of  a  simple  and  effec- 
tive record  of  amounts  paid  to  brokers  or  agents  as  com- 
missions on  time  sales  of  the  concern's  property  where  the 
commission  is  paid  as  instalments  are  received  from  the 
purchasers.  This  difficulty  becomes  serious  when  there  is 
a  large  number  of  such  sales  running  at  the  same  time. 
Form  12  will  be  found  useful  under  such  circumstances, 
especially  in  connection  with  commissions  payable  on  op- 
tions, etc.  As  will  be  seen,  it  is  at  once  an  option  and  com- 
mission ledger,  but  it  is  equally  applicable  to  any  time 
sale. 


REAL    ESTATE   ACCOUNTS 


Name 
Addre: 
Assign 

Lot 
Pric 
Cod 
Cor 

Deet 

WnrJt               A 

ddHio 
nourr 

n 

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DATE 

ITEM 

rcuo 

AMOUNT 

CATC 

ITEM 

raw 

AMOUNT 

COMMISSION  RAID 

,.  — 

~~"            •  . 

_  —  • 



Form  12.     Commissions  Payable  Ledger 

§  22.    Brokerage  (Commissions  Earned)  Ledger 

The  brokerage  ledger  is  used  for  the  purpose  of  record- 
ing all  the  transactions  which  yield  a  brokerage  or  a  com- 
mission. (See  Chapter  XXX.)  The  record  is  a  simple  one 
and  may  be  of  the  style  shown  in  Form  13. 

The  profits  arising  from  commissions  on  the  sale  of  real 
estate  are  unusually  simple.  In  the  great  majority  of  cases 
they  are  paid  in  cash  or  its  equivalent  as  soon  as  a  sale  is 
completed,  and  are  entered  directly  in  the  cash  book  or 
journal,  as  the  case  may  be.  In  the  matter  of  commissions 
on  time  sales,  especially  where  the  payments  are  small,  it  is 
a  common  custom  for  the  owner  to  make  some  particular 
arrangement  with  the  agent,  such  as  agreeing  to  pay  him, 
say,  50%  of  all  collections  until  the  commission  is  fully 
paid. 


SUB-LEDGERS 


Z 


SHEET    NQ 
NAME  

ADDRESS. 


ACCOUNT  na 


DATE 


ITEMS 


rocytC&W 


tWvWOXKW  Jffo 


DEBITS 


tlooo 


ITEMS 


in 


J     CREDITS 


1&QSLOQ  - 


Form  13.     Brokerage   (Commissions  Earned)   Ledger 

§  23.     Subdivision  Customers  Ledgers 

These  sub-ledgers  (Forms  14,  15,  16)  contain  accounts 
with  individual  purchasers  of  lots  included  in  subdivisions 
handled  by  the  concern  (§§  173,  174).  If  the  concern  buys 
a  house,  and  then  sells  that  house  on  contract,  the  account 
with  the  purchaser  would  be  entered  in  the  general  con- 
tracts ledger  (Form  n)  ;  but  if  the  concern  bought  1,000 
acres  of  land  and  divided  it  into  500  tracts,  the  accounts 
with  the  various  customers  for  each  of  these  tracts  would 
be  kept  in  one  of  these  subdivision  customers  ledgers,  one 
such  ledger  being  devoted  to  each  subdivision. 

Inasmuch  as  these  accounts  are  of  a  somewhat  tempo- 
rary nature,  frequently  lasting  not  more  than  two  or  three 
years,  it  is  not  necessary  to  use  so  substantial  a  book  as 


REAL    ESTATE   ACCOUNTS 


NAME 
ADDC 

'                                                                                                           £ 

CCOUNT  NC 
WEET  NO._ 

1 

=SS                                                                                                     ? 

NT 

DATE 

IDM 

ra. 

DEBHS 

CREDTTS 

BALANCE 

DATE 

rrtu 

TX. 

DEBITS 

CREDfTS 

BALANCE 

~*~~~  — 

_^~\_ 

pj 

Form  14.    Subdivision  Customers  Ledger 

has  been  indicated  for  the  preceding  ledgers.  Form  15, 
discussed  in  §  174,  shows  an  improved  method  for  keeping 
these  accounts. 

In  some  cases  it  is  possible  to  use  a  tabular  form  of 
ledger  not  unlike  the  "Boston"  ledger  so  largely  used  in 
banks.  This  form  is  well  adapted  to  a  comparatively  small 
subdivision  in  which  all  the  lots  are  disposed  of  by  contract 
in  a  short  time.  In  such  a  case  each  lot  is  entered  in  order 
of  date  on  one  line,  or  the  names  of  the  purchasers  are  en- 
tered in  alphabetical  order,  an  index  being  provided  in  the 
former  case  to  show  the  name  of  each  customer  and  the 
number  of  his  contract.  Form  16  shows  the  proper  ruling. 

By  the  use  of  "short  leaves,"  a  record  of  this  kind  ex- 
tending over  three  or  four  years  can  be  kept  in  a  book  of 
convenient  size.  The  chief  advantage  of  this  form  lies  in 


SUB-LEDGERS 


43 


o 

NAM! 
STRE 
CITY. 

j 

TERMS 

LOT 

OB 
TPA/T 

T 

E 

1 

1LOCK 
lECTION 

pr«vovr 

IWE 

DC. 

CO. 

BALANCE 

RESERVE 

RESERVE 
REAUZED 

Form  15.    Subdivision  Customers  Ledger 

the  fact  that  it  dispenses  with  the  necessity  of  drawing  off 
a  trial  balance  of  the  sub-ledger,  as  a  total  of  the  "Balance" 
column  gives  this  at  once.  If  any  error  has  been  made  it 
can  be  quickly  detected,  for  the  total  of  the  receipt  column 
for  any  month  must  agree  with  the  total  of  the  correspond- 
ing column  in  the  cash  book  plus  any  journal  entries  which 
may  have  been  made. 

Whatever  the  form  of  record  used  for  these  subdivision 
accounts,  a  fixed  rule  should  always  govern  where  contracts 
are  transferred — a  proceeding  of  frequent  occurrence.  In 
some  offices  it  is  the  practice  to  write  the  name  of  the  trans- 
feree on  the  existing  ledger  sheet,  and  then  transfer  this 
sheet  to  its  location  in  alphabetical  order;  e.g.,  if  a  lot  is 
bought  by  John  Doe  and  an  account  opened  with  him,  and 
this  lot  is  sold  to  Richard  Roe,  the  latter's  name  is  written 
over  Doe's,  and  the  sheet  transferred  and  placed  under  the 


44 


REAL    ESTATE   ACCOUNTS 


PRICE 


REOl 


RECD. 

rca 


BALANCE 


52- 


joo 


Form  16.    Tabular  Ledger  for  Subdivision  Accounts 

R's.  This  method  leads  to  confusion,  for  the  sale  is  re- 
ferred to  sometimes  under  one  name  and  sometimes  under 
the  other ;  or  the  tickler  and  other  records  may  fail  to  show 
the  transfer.  The  best  method  is  to  close  John  Doe's  ac- 
count by  the  entry  (preferably  in  red  ink)  "Balance  trans- 
ferred from  John  Doe  to  Richard  Roe."  In  this  way  it  is 
always  easy  to  trace  the  history  of  any  lot,  even  if  the 
tickler  is  deficient. 


The  accountant  should  allow  no  month  to  pass  without 
taking  off  a  trial  balance  from  each  and  every  sub-ledger, 
even  if  it  is  only  an  adding  machine  list ;  and  in  all  cases 
these  lists  should  be  filed  with  the  month's  papers  for  future 
reference. 


CHAPTER  VI 

PROPERTY   RECORDS 

§  24.    Report  of  Real  Estate  Transactions 

To  record  the  technical  details  of  real  estate  transactions 
in  a  proper  manner,  the  bookkeeper  must  be  furnished  with 
complete  data,  and  this  can  best  be  accomplished  by  the  use 
of  special  forms.  Form  17  will  suggest  the  lines  to  be 
followed,  the  salesman's  report  shown  giving  the  facts  of 
each  sale.  A  slight  modification  of  the  sales  form  will 
adapt  it  for  a  report  of  purchases.  After  these  facts  are 
recorded  by  the  bookkeeper,  the  reports  should  be  per- 
manently filed  for  reference  in  case  any  question  arises  in 
the  future  as  to  the  details  of  a  transaction. 

The  use  of  some  such  adequate  form  of  report  cannot 
be  emphasized  too  strongly,  for  otherwise  the  records  will 
often  show  blank  spaces  where  information  should  be  found. 
In  other  words,  it  is  impossible  to  maintain  a  complete  set 
of  real  estate  records  without  a  sure  and  uniform  founda- 
tion as  to  purchases  and  sales,  such  as  is  afforded  by  this 
form  of  report. 

The  certificate  of  title  shown  in  Form  18  is  the  result 
of  a  good  many  years'  experience  and  may  be  taken  as  a 
general  indication  of  what  is  desired,  the  chief  object  being 
to  set  forth  clearly  and  briefly  the  main  facts,  instead  of 
leaving  them  to  be  "dug  out"  of  an  opinion  of  title  occupy- 
ing perhaps  many  pages  of  typewriting. 

§  25.    Property  Index 

The  purpose  of  this  index  is  to  enable  the  bookkeeper 
to  turn  to  the  records  of  any  piece  of  property  though  only 

45 


46  REAL   ESTATE  ACCOUNTS 

THE  ALPHA  LAND   COMPANY 
JACKSONVILLE,  FLA. 


REPORT  OF  PROPOSED  SALE 

No 


I  have  this  day  arranged  to  sell  to 
................................   of 

the  following  described  property  owned  by 

Lot 

Block 

Subdivision 

on  which  there  is  situated 
The  total  purchase  price  is  ..............................     $ 

Payable  as  follows  :     Cash  ..................  $  .......... 

Contract,  payable  $  .........  monthly  ........  $  .......... 

First  payment  due  .......................... 

Mortgage,  payable  ..........................  $  .......... 

He  is  also  to  assume  mortgage,  viz  : 

........................  $  .......... 


Making  the  total  price  of  $ 

Interest  is  to  be  payable at  the  rate  of per  cent. 

Commission  of  $ payable  to 

IMPROVEMENTS: 

The  company  agrees  to  erect  for  the  purchaser  a 

which  is  estimated  to  cost  $ ,  which  is  to  be  added  to  the 

above  figures  and  is  to  be  covered  by  the  above  payments. 

Salesman 

Papers  drawn: 

Entered,  Property  No.  Mtge.  Payable  No. 

Contract  No.  Book  tickler 

Mtge.  Receiv.  No.                             Plat 
Approved 

Form  17.    Report  of  Sale 


PROPERTY   RECORDS  47 

Opinion  No Application  No Loan  No 

UNITED  STATES  TRUST  &  SAVINGS  BANK, 
Jacksonville,  Fla. 

191  •• 

Gentlemen : — 

I  hereby  certify  that  I  have  examined  the  title  to  the  following 
described  property,  lying  County,  viz.  : 

as  set  forth  in  the  following  abstracts,  viz. : 

No made  by Dated 

(Leave  blanks  here  for  further  abstracts.) 
Based  upon   these   abstracts,   my  opinion   as  to   the   title  to   said 

property  is  as  follows : 

1.  The  Fee  Simple  title  was  on  the day  of 191 .. 

vested  in 

Subject  to  the  following  encumbrancees : 

2.  Mortgages 

See  entries  Nos Abstracts  Nos 

3.  Taxes,  State  and  County 

4.  Taxes,   Municipal 

5.  Other  liens  and  judgments 

See  entries  Nos Abstracts  Nos 

6.  If  the  encumbrances  noted  above  be  cleared  from  the  title  by  the 

following  action 

7.  In  my  opinion  a  promissory  note,  secured  by  a  mortgage  executed 

by would,  when  duly 

recorded,  constitute  a  first  lien  on  said  property. 


Attorney-at-Law 
Remarks : 


Form  18.     Certificate  of  Title 


REAL    ESTATE   ACCOUNTS 


the  name  of  the  vendor  is  known,  and  furnish  a  list  of  all 
real  estate  acquired.  It  is  convenient  to  number  each  piece 
of  property  consecutively  as  it  is  acquired,  and  to  give  it 
some  descriptive  title,  as  the  "Jones  Property,"  the  "Carsley 
Hill  Property,"  or  the  name  of  a  subdivision  of  a  larger 
property,  as  "Lake  Side."  In  any  case,  the  name  or  names 


NO 

DESCBIPTION 

A 

B 

C 

D 

E 

F 

G 

H 

1 

J 

K 

L 

M 

N 

1 

£.  2.  4Wf£  CLcLU. 

•6^ 

^L 

ird 

^'( 

(3. 

2 

0£.  20,  J&opts  ddd^. 

^ 

fe 

fc 

\ 

3 

fiat-Mi.  (J^tt^l,  )tta/> 

% 

idt> 

ucvfc 

£>,'5 

P 

ff 

<— 

--, 

Form  79.     Property  Index 

selected  are  entered  on  the  property  index  in  the  column 
headed  with  the  initial  letter  of  that  name,  as  indicated  in 
Form  19.  Each  piece  of  property  should  be  entered  im- 
mediately on  receipt  of  the  deed.  Such  an  index  enables 
any  employee,  whether  familiar  with  the  books  of  account 
or  not,  to  refer  promptly  to  any  particular  property. 

§  26.    Property  Ledger — Wild  Lands 

The  property  ledger  is  the  most  technical  and  distinc- 
tive of  the  entire  series  of  real  estate  records,  and  one  of 


PROPERTY   RECORDS 


49 


Width 
Column  Purpose  of  Column  Inches 

1  For  description  (By  metes  and  bounds  or  by  forties) 6  7/8 

2  Section    7/l6 

3  Township   7/16 

4  Range 7/16 

5]                             ("Deed  No 1/2 

6    Whence  Pate  of  Deed 3/4 

I    Derived  Grantor  •  ;••"••  •  ~"  *  *A 

\\  [Recordedl^.... .....................      1/2 

10  Abstract  No 1 1/16 

11  f  Instrument  3/4 

12  r>      :^,,  From  ..  .   i  1/2 

»«==• 

16 1  f  Valuers  i 

17  [  Value  •  Date  3/4 

i8J  [Amount  I 

19    Cost i 

20 1  f  Nature  i 

21  \  Encumbrances  •  Mortgage  No 1/2 

22  J  [  Amount I 

23]  [Year 1/2 

24  State  and  Valuation I 

25  County  •  Amount  of  Taxes I 

26  Taxes  Date  Paid 3/4 

27  J  [  Receipt  No 5/8 

28]  [Date  3/4 

29  \  Charges  •  Purpose  I  5/8 

30  J  [  Amount I 

3i]  [Date  3/4 

32  I-  Disposition       •  To i  1/2 

33  J  [  Sales  Record 3/4 

34  Remarks  6 

Form  20.    Property  Record  or  Tract  Book  (table  showing  the  nature 
and  width  of  columns) 

the  most  important.  It  records  all  the  details  of  every 
piece  of  property  in  which  the  concern  is  interested.  In 
other  lines  of  business  there  is  no  record  with  which  the 
property  ledger  may  compare,  unless  perhaps  a  perpetual 
inventory;  but  real  estate  is  a  less  liquid  asset  than  mer- 
chandise, and  the  items  of  a  property  ledger  have  a  value 


REAL   ESTATE  ACCOUNTS 


PROPERTY  RECORDS 


t 


£ 


52  REAL    ESTATE  ACCOUNTS 

far  more  permanent  than  the  items  of  a  mercantile  inven- 
tory. Particulars  regarding  merchandise  can  usually  be 
gathered  from  filed  invoices,  whereas  the  corresponding 
information  regarding  real  estate  is  more  varied  and  tech- 
nical, and  is  more  difficult  to  obtain  as  it  must  be  drawn 
from  a  variety  of  records.  The  property  ledger  will  be 
found  equally  useful  in  other  lines  of  business  when  large 
tracts  of  land  are  held. 

Owing  to  the  many  purposes  which  a  property  ledger 
serves,  it  is  difficult  to  devise  a  single  form  which  will  in  all 
cases  yield  the  best  results.  Several  forms  are  therefore 
given,  which,  besides  meeting  the  requirements  of  the  special 
cases  for  which  they  were  designed,  will  suggest  forms 
suitable  under  other  conditions.  The  problem  is  to  provide 
a  record  which  is  convenient  for  reference  and  which  ex- 
hibits clearly  all  the  essential  facts. 

Forms  20  and  21  illustrate  respectively  the  bound  vol- 
ume and  the  loose-leaf  book.  Experience  has  demonstrated 
the  great  superiority  of  the  loose-leaf  form.  It  is  more  con- 
venient in  size,  and  provides  for  indefinite  expansion  by  the 
insertion  of  additional  leaves  wherever  they  may  be  re- 
quired. On  account  of  this  elasticity  it  has  nearly  displaced 
the  bound  book. 

Form  20,  the  bound  volume,  can  be  used  to  best  ad- 
vantage in  cases  where  no  new  land  is  to  be  acquired,  i.e., 
where  the  concern  can  at  once  make  up  complete  and  final 
lists.  The  following  remarks  apply  equally  to  Forms  20 
and  21. 

The  first  step  in  writing  up  a  property  ledger  is  to 
select  the  unit,  and  as  there  is  no  uniform  method  of  sur- 
veying which  has  been  adopted  throughout  the  entire 
United  States,  it  is  impossible  to  give  forms  applicable 
everywhere.  The  examples  which  follow  are  based  on  a 
United  States  township  as  being  the  most  generally  used. 


PROPERTY    RECORDS  53 

In  making  the  entries,  the  data  should  always  be  taken 
direct  from  original  deeds  and  not  from  transcripts  or  mem- 
oranda. Every  time  a  description  is  copied  the  probability 
of  error  is  multiplied,  and  for  this  reason  the  record  should 
always  be  made  directly  from  deed  to  ledger. 

For  convenience  in  making  up  tax  lists  and  tax  returns, 
it  is  best  first  to  arrange  the  lands  by  counties,  as  it  is 
usually  the  county  which  assesses  and  collects  the  taxes. 
Having  done  this,  let  it  be  assumed  that  the  unit  within  the 
county  is  the  township.  This  unit  is  six  miles  square,  and 
is  ordinarily  divided  into  36  sections,  numbered  from  i  to 
36,  although  it  frequently  happens  that,  owing  to  old  grants 
or  other  similar  causes,  townships  are  irregular.  In  such 
instances  the  irregular  sections  are  usually  indicated  by 
numbers  from  37  upwards.  As  a  rule,  all  the  lands  owned 
in  any  one  section  should  be  entered  on  the  same  sheet  of 
the  property  ledger,  although  in  some  cases  a  finer  sub- 
division may  be  made  with  advantage,  as  for  instance, 
where  different  lands  in  the  same  section  are  derived  from 
different  sources. 

The  sheets  of  the  property  ledger  should  then  be  ar- 
ranged in  regular  order,  either  of  township  or  of  range, 
some  offices  preferring  one  order  and  some  the  other.  By 
the  order  of  township  is  meant  the  following  arrangement : 

Section  I       Township  i       Range  I 


I  i 

i  "2 

1  "2 

2  "      i 

2  "2 


The  regular  section  consists  of  640  acres,  divided  into 
quarter  sections  and  described  as  N.E.  *4»  etc.,  each  of 
which  is  again  subdivided  into  4O-acre  tracts,  described  as 
N.E.  *4  °f  N.E.  ^4,  etc.  When  a  whole  section,  or 


54 


REAL    ESTATE  ACCOUNTS 


s 


"2 
5 


h 

9 


PROPERTY  RECORDS 


55 


§ 
P 


UJ 


ft 


|  |  S 


sn 


REAL   ESTATE  ACCOUNTS 


0 

t3 

<L> 

Q 

S 

E 

o 

rt 

<u         £, 

bfl,      ^ 

rt  - 

a 

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PROPERTY   RECORDS  57 

any  portion  consisting  of  more  than  40  acres,  is  written 
on  the  property  ledger  sheet,  the  tract  should  be  broken  up 
into  these  forties,  and  the  exact  acreage  be  shown.  It  will 
be  seen  in  the  timber  land  record  shown  in  Form  22  that 
1 6  lines  are  provided,  one  for  each  "forty"  in  a  section,  so 
that  if  this  plan  is  followed,  the  disposition  of  any  forty 
may  be  shown  without  disturbing  or  rewriting  the  descrip- 
tions for  the  rest  of  the  section.  It  will  frequently  occur 
that  descriptions  of  small  tracts  in  irregular  sections  are 
so  complex  that  it  is  advisable  to  enter  each  one  on  a  sep- 
arate sheet  as  in  Form  23. 

It  is  sometimes  required  to  form  a  bound-book  record 
from  a  mass  of  deeds  covering  contiguous  lands.  In  such 
cases  it  is  convenient  to  use  the  listing  slip  shown  in  Form 
24  for  the  description  of  the  property.  These  slips  measure 
5^2  X  ii  inches,  and  when  printed  can  be  put  up  in  pads. 
They  are  written  up,  one  for  each  deeded  piece  of  land,  ar- 
ranged in  order,  and  copied  into  the  book,  the  entries  being 
checked  against  the  original  deeds. 

The  property  record  outlined  in  Form  20  is  one  used  in 
an  office  which  controls  large  tracts  of  land  of  varied  char- 
acter and  widely  distributed.  It  is  a  bound  book  and  its 
data  was  compiled  by  the  use  of  the  land  list  shown  in  Form 
23,  and,  as  no  further  lands  were  acquired,  the  bound-book 
form  has  not  been  found  inconvenient,  though  the  entries 
relating  to  taxes  have  overflowed  the  space  allotted  to  them. 

The  sheets  used  in  this  record  are  21  inches  wide  and 
i7l/2  inches  deep,  making  a  book  42  inches  wide  when  open, 
the  record  running  entirely  across  the  folios.  The  books 
from  which  these  dimensions  are  taken  form  a  series  in 
which  were  recorded  lands  in  some  thirty  different  counties. 

Each  page  is  headed  with  the  name  of  the  county  in 
which  the  land  lies.  The  horizontal  ruling  is  in  faint  blue 
with  five  lines  to  the  inch,  every  ninth  line  being  ruled  in 


REAL   ESTATE   ACCOUNTS 


PROPERTY  RECORDS 


59 


heavy  purple ;  no  more  than  one  section  of  land  is  entered 
in  the  space  between  the  purple  lines. 

Columns  5  to  9  are  frequently  of  great  use  in  showing 
the  source  from  which  the  particular  land  came  —  a  fact 
it  is  often  convenient  to  have  at  hand.  Columns  n  to  14 
are  required  in  cases  where  it  is  convenient  to  show  those 
through  whom  title  has  passed.  This  information  is  es- 
pecially useful  in  some  states  where  land  is  held  under  tax 
titles  of  more  or  less  uncertain  value.  If  these  columns 
are  omitted,  a  double  set  of  "Taxes"  columns  may  be  in- 
serted. 

The  property  ledger  shown  in  Form  21  was  devised  for 
a  land  company  owning  wild  lands  and  city  property,  and 
is  practicable  for  both  classes.  The  size  of  the  sheet  is 
shown  as  9)4  X  nj4  inches,  although  many  prefer  n  X  12 
inches.  The  blank  heading  is  of  sufficient  size  to  allow  an 
ordinary  description  to  be  given  at  length.  The  back  of 
the  sheet  provides  for  a  record  of  taxes  paid  and  expenses 
incurred. 

The  timber  land  record  shown  in  Form  22  was  arranged 
for  an  estate  consisting  of  pine  lands,  the  title  of  which 
rested  in  sundry  individuals.  It  provides  for  the  following 
special  points : 

1.  Plats  of  the  lands  described,  this  information  being 

permitted  by  the  large  headings. 

2.  Particulars  as  to  turpentine  and  logging,  etc. 

3.  The  record  of  the  tax  assessor's  description  in  the 

tax  statement  on  the  reverse  side  of  the  sheet. 

As  a  considerable  part  of  these  lands  lay  in  large  grants, 
the  descriptions  being  by  metes  and  bounds,  the  tax  as- 
sessor's description  was  merely  the  book  and  page  on  which 
was  recorded  the  deed  conveying  the  particular  piece  tc  be 
taxed.  Until  this  information  was  entered  on  the  prop- 


60  REAL   ESTATE  ACCOUNTS 

erty  record,  there  was  constant  difficulty  in  assigning  to  the 
particular  property  any  item  of  taxes  paid. 

This  form  was  used  in  connection  with  the  land  list 
shown  in  Form  23,  and  as  the  lands  were  being  continually 
used  for  grazing,  logging,  and  turpentine,  it  proved  very 
satisfactory. 

Whatever  form  of  property  record  is  adopted,  great 
care  must  be  taken  to  insure  the  entry  of  all  particulars  of 
a  general  nature,  such  as  quality  of  soil,  timber,  minerals, 
etc. ;  also  all  options,  leases,  or  privileges  of  any  kind  which 
may  have  been  granted,  as  well  as  the  receipt  of  any  con- 
sideration therefor,  either  on  the  Principal  account  or  on 
the  memorandum  income  account. 

As  will  be  noted,  apart  from  its  other  uses  the  property 
ledger  forms  a  perpetual  inventory  of  what  is  practically 
the  "merchandise"  of  a  real  estate  concern.  One  of  the 
features  of  real  estate  accounting  is  the  comparative  ease 
with  which  an  absolutely  correct  record  of  everything  "on 
hand"  can  be  maintained. 

All  the  property  records  shown  here  provide  for  the 
entry  of  details  regarding  taxes  as  well  as  of  land  descrip- 
tions. Thus  the  value  of  such  a  record  increases  with  its 
age.  The  forms  must  necessarily  be  modified  to  meet  local 
conditions.  (See  Chapter  XXXV.)  It  is  important  to 
have  such  a  complete  record,  but  this  fact  is  frequently 
overlooked. 

§  27.    Property  Ledger,  City  Properties 

It  is  beyond  question  that  the  most  convenient  form  for 
the  record  of  city  properties  is  a  loose-leaf  book.  As  al- 
ready stated,  the  property  ledger  shown  in  Form  21  is 
suitable  for  this  purpose,  as  is  also  the  city  property  ledger 
shown  in  Form  25.  The  latter  form  provides  for  the  entry 
of  all  essential  information  and  is  almost  self-explanatory. 


PROPERTY    RECORDS  6l 

Particulars  as  to  appraisals  and  selling  price  may  be  entered 
in  the  "Remarks"  division,  while  expense  and  receipts  may 
be  put  on  the  back  as  memoranda. 

The  most  convenient  method  of  arranging  this  ledger 
is  to  keep  together  all  sheets  relating  to  the  same  subdi- 
vision, arranging  them  in  alphabetical  or  geographical  or- 
der as  may  be  desired,  and  separating  them  by  blank  sheets 
of  heavy  paper,  to  each  of  which  is  attached  a  movable  in- 
dex tag  giving  the  name  of  the  plat  referred  to  on  the 
sheets  following.  This  method  gives  immediate  access  to 
the  records  of  any  piece  of  property  of  which  the  descrip- 
tion is  known.  If  the  name  of  the  vendor  is  known,  refer- 
ence to  the  property  index  (Form  19)  will  give  the  subdi- 
vision ;  while,  if  only  the  street  address  is  known,  the  prop- 
erty can  be  located  by  means  of  the  rent  record  given  in 
Form  32  (§  37). 

Such  an  arrangement  assists  an  auditor  materially,  as 
it  insures  against  the  duplicate  entry  of  any  piece  of  prop- 
erty and  provides  for  the  entry  of  all  mortgages  on  any 
property  in  one  place — matters  which  could  not  be  de- 
termined under  any  other  arrangement  without  much 
search. 

To  illustrate,  let  us  suppose  that  a  piece  of  property  is 
described  in  several  ways,  such  as  "part  of  lot,"  or  "north 
^2  of  lot,"  or  by  metes  and  bounds.  Quitclaim  deeds  to  the 
property  may  be  obtained,  in  each  of  which  a  different  form 
of  description  is  used.  If  the  property  ledger  is  arranged 
in  the  order  of  the  dates  of  deeds,  or  in  alphabetical  order 
by  the  names  of  grantees,  separate  mortgages  might  be  en- 
tered under  the  several  descriptions,  and  one  or  more  might 
escape  even  a  careful  checking. 

When  writing  up  the  property  ledger  sheet  for  any  im- 
proved property,  care  should  be  taken  to  enter  separately 
the.  value  of  the  land  and  the  value  of  the  improvements, 


62 


REAL    ESTATE  ACCOUNTS 


PROPERTY  RECORDS 


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REAL   ESTATE  ACCOUNTS 


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PROPERTY   RECORDS  65 

even  if  this  division  of  the  cost  must  be  approximated.  This 
information  is  necessary  for  insurance  purposes,  and  also 
in  connection  with  tax  matters,  and  to  determine  whether 
or  not  depreciation  should  be  charged — .something1  con- 
sidered more  fully  under  "Depreciation"  (Chapter  XXXII). 

It  not  infrequently  occurs  that  land  bought  and  en- 
tered as  wild  land,  or  as  a  city  block,  is  subsequently  sub- 
divided and  replatted  into  small  parcels.  If  the  subdivision 
contains  a  large  number  of  lots,  it  is  not  necessary  to  enter 
each  separately  on  the  property  ledger,  as  they  can  better 
be  recorded  on  the  plat  books  and  ticklers  discussed  in 
§§  29,  30. 

If  comparatively  few  lots  result  from  such  subdivision 
or  replatting,  it  may  be  advisable  to  carry  each  lot  in  the 
property  ledger  on  its  own  account.  In  such  case,  the  origi- 
nal account  in  the  property  ledger  is  closed  by  a  journal 
entry  and  new  accounts  are  opened,  one  for  each  lot  of  the 
subdivision,  care  being  taken  to  divide  properly  the  cost 
among  the  new  subdivided  lots. 

The  property  ledger  shown  in  Form  26,  given  as  an 
alternative  method  of  recording  property,  is  entirely  differ- 
ent from  the  property  ledgers  already  shown.  It  was  de- 
signed for  English  practice  —  a  fact  which  accounts  for 
the  small  space  reserved  for  rents,  which  in  that  country 
are  generally  paid  quarterly. 

§  28.    Field  Record 

It  is  often  advisable  to  have  a  record  of  wild  lands  or 
of  city  lots,  which  may  be  carried  in  the  pocket.  In  such 
cases,  the  most  convenient  form  is  a  small  loose-leaf  book, 
•  5  X  724  inches,  in  which  each  page  is  devoted  to  one  piece 
of  property  and  shows  the  important  particulars.  For  lands 
divided  into  United  States  townships,  pocket  plats  may  be 
used,  on  each  page  of  which  a  skeleton  township  is  ruled. 


66 


REAL    ESTATE   ACCOUNTS 


R  E  No                      No. 

Price  $ 

Bet. 

Height- 

Material 

Lot 

SJ36 

Heated  by 

Rooms 

Lease 

Plumbing 

Survey 

Assd.Val.                               Mtqe. 

Price 

Ina                                    Due 

Improvements 

Remarks 

bt  $                          1st  $ 

2nd  $                              2nd* 

3rd  $                            3rd  $ 

4ih  $                           4ihJ 

5»h  $                           5tti$ 

Total-tental   $ 

O 

Form  27.     Card  Property  Record  (face) 


O 


Form  28.    Card  Property  Record  (back) 


PROPERTY   RECORDS  67 

Still  another  alternative  is  to  keep  a  card  index,  subdi- 
vided so  that  it  is  possible  to  remove  quickly  all  the  cards 
relating  to  a  certain  district,  and  carry  them  when  making 
an  examination  on  the  grounds.  A  card  record  of  this 
style  is  shown  in  Forms  27  and  28,  the  particulars  being 
practically  the  same  as  would  appear  in  the  small  loose-leaf 
book  mentioned  above. 

Such  records  are  almost  essential,  as  much  information 
can  best  be  secured  on  the  grounds  and,  with  this  pocket 
record,  may  be  immediately  entered  in  its  appropriate  place. 
The  record  then  forms  also  a  tickler,  which  may  be  car- 
ried in  the  pocket  during  inspection  trips  or  when  showing 
properties  to  prospective  buyers. 

§  29.    Subdivision  Ticklers 

In  the  case  of  what  is  known  as  subdivision  property, 
it  is  well  to  have  a  separate  tickler  for  each  subdivision. 
The  usual  method  of  keeping  this  is  either  on  cards  or  in 
loose-leaf  books,  each  tickler  being  accompanied  by  a  plat 
or  map  of  the  subdivision  in  question.  This  plat  should 
show  clearly  all  lots  in  the  subdivision  owned  by  the  com- 
pany, those  covered  by  option  or  by  contract,  and  those 
which  have  been  conveyed  to  purchasers  or  others.  To  dis- 
tinguish these  various  classes  of  lots,  check  marks  of  differ- 
ent colors  may  be  used.  Such  plats  are  not  only  of  daily 
use  to  the  office  force,  but  display  clearly  the  facts  which 
an  auditor  must  have  when  verifying  the  amount  of  prop- 
erty on  hand  as  against  the  amount  of  money  charged  to 
such  property  in  the  real  estate  ledger. 

A  loose-leaf  form  of  tickler  is  shown  in  Form  29,  one 
leaf  or  more  being  devoted  to  a  block  (or  corresponding 
division),  and  two  or  three  lines  being  allowed  for  each 
lot  in  that  block.  On  these  lines  appear  the  names  of  the 
purchasers,  which  in  the  case  of  time  sales  are  best  written 


68 


REAL   ESTATE   ACCOUNTS 


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PROPERTY    RECORDS  69 

in  pencil,  as  transfers  or  assignments  are  of  frequent  oc- 
currence. 

§  30.    Plat  Book 

This  book  is  composed  of  plats  of  the  lands  described 
in  the  property  ledger.  In  those  states  in  which  the  United 
States  township  is  used,  these  plats  can  be  most  easily  shown 
on  the  official  government  plats  of  each  township,  which 
may  be  obtained  from  the  United  States  land  offices  and 
should  be  mounted  on  canvas  before  being  bound.  By  the 
use  of  varied  tints,  different  interests  and  different  con- 
ditions may  be  more  conspicuously  shown  on  these  plats 
than  in  a  written  record,  although  the  property  ledger  must 
furnish  the  necessary  information. 

§  31.    Record  of  Deeds  Received 

The  object  of  this  record  is  to  facilitate  reference  to 
any  desired  deed.  There  are  two  forms  in  which  this  rec- 
ord may  be  kept,  one  of  which  is  a  numerical  index  in 
which  there  are  columns  for  the  following  details:  num- 
ber of  deed;  name  of  grantor;  kind  of  deed,  that  is,  war- 
ranty deed,  quitclaim  deed,  etc. ;  date  of  deed ;  place  of 
recording  deed ;  county ;  space  for  various  entries. 

Form  23  (  §  26)  may  be  used  as  an  alternative.  Although 
this  form  requires  more  writing  than  that  described  above, 
it  saves  constant  reference  to  the  actual  deeds,  which  should 
be  kept  in  the  vault.  The  form  chosen  must  depend  on 
the  preference  of  the  person  keeping  the  record  and  on  the 
requirements  of  his  office.  In  a  general  way  it  may  be 
said  that  the  form  first  mentioned  is  better  adapted  to  the 
needs  of  a  general  land  company  which  buys  and  sells  lands, 
while  Form  23  better  serves  the  needs  of  those  who  hold 
lands,  not  primarily  for  sale,  but  for  investment,  grazing, 
logging,  or  other  similar  purposes. 


70  REAL    ESTATE   ACCOUNTS 

§  32.    Record  of  Deeds  Issued 

Special  attention  is  called  to  the  record  of  deeds  issued 
(Form  30),  the  object  of  which  is  to  keep  a  permanent 
record  of  every  deed  executed  by  the  concern.  This  matter 
is  often  overlooked  in  real  estate  offices,  but  a  little  thought 


Deed  No. 

Date From 

To 

Consideration  $. .  .   Actual 


Terms   

Payable  

Property:  Tract  Book  No Serial  No. 

County 


Contract  No Mortgage  No. 

Other  Papers  delivered 


Executed  by 

Delivered  to 

Total  Acres Value  on  lists  $. 

C.  B Gain  $. 

Journal Loss  $. 

Verified  by 

Form  jo.    Record  of  Deeds  Issued 


PROPERTY   RECORDS  71 

will  show  its  importance.  No  wholesale  merchant  will  de- 
liver goods  without  keeping  some  record  of  the  transaction ; 
yet  many  real  estate  offices,  even  though  doing  a  large  busi- 
ness, fail  to  keep  any  distinct  record  of  deeds  and  other 
similar  papers  executed  and  delivered. 

If  all  deeds  given  by  a  concern  are  to  be  of  one  form, 
it  is  best  to  have  them  printed,  numbered  consecutively,  and 
bound  in  book  form  on  stubs.  Each  stub  should  provide 
appropriate  spaces  for  the  following  information : 

Date  of  deed;  name  of  grantee;  consideration  (both  the 
actual  and  the  nominal,  if  they  differ)  ;  terms  of  sale  and 
method  of  payment;  description  of  property,  with  serial 
number ;  number  of  contract  or  mortgage  in  connection  with 
which  deed  is  issued ;  names  of  parties  executing  the  deed ; 
name  of  person  to  whom  deed  is  delivered ;  any  other  pa- 
pers delivered,  such  as  releases,  quitclaim  deeds,  etc. 

In  using  this  form,  the  blanks  are  filled  in  with  pen  and 
ink.  Care  should  be  taken  to  compare  the  stub  with  the 
deed,  when  both  are  completed,  and  to  have  the  stub  in- 
itialed by  the  person  responsible  for  the  verification.  In 
the  case  of  subdivision  properties  of  large  size,  it  is  con- 
venient to  have  a  separate  deed  book  for  each  subdivision, 
with  the  name  or  description  of  such  subdivision  printed 
thereon. 

Another  system  of  keeping  office  records  of  deeds  is- 
sued is  to  have  the  deed  form  occupy  but  a  single  page, 
and  to  make  a  carbon  copy  of  each  deed  as  it  is  issued. 
These  copies  are  then  arranged  numerically  and  filed  in  a 
binder.  This  system  gives  good  results,  the  only  serious 
objection  being  that  when  a  copy  of  a  certain  deed  is  called 
for,  there  is  a  strong  temptation  to  remove  it  from  the 
binder,  with  the  probability  that  it  may  not  be  returned  to 
its  proper  place. 

If  various  forms  of  deeds  are  used,  the  record  may  be 


72  REAL   ESTATE  ACCOUNTS 

kept  in  a  book  specially  prepared  for  that  purpose.  In  ad- 
dition to  the  particulars  already  mentioned,  this  book  should 
show  the  kind  of  deed  given,  i.e.,  warranty,  special  war- 
ranty, quitclaim,  etc.  The  record  shown  in  Form  30  has 
been  used  for  this  purpose  for  many  years  by  a  company 
whose  head  office  is  far  distant  from  the  local  office  in 
which  the  business  is  transacted.  The  head  office  keeps  a 
complete  duplicate  set  of  records,  copied  originally  from 
the  local  books  and  kept  up  to  date  from  the  record  of 
deeds  issued. 

Whatever  method  may  be  adopted,  the  rule  should  be 
rigidly  observed  that  no  deed  be  allowed  to  leave  the  office 
until  a  permanent  written  record  of  it  is  made.  At  the 
time,  this  may  appear  of  little  consequence,  but  in  all  rec- 
ords connected  with  real  estate  there  is  a  strong  possibility 
that  at  some  future  time  it  may  be  necessary  to  refer  to 
the  original  transaction,  and  permanent  records  are  there- 
fore even  more  necessary  in  this  line  of  business  than  they 
are  in  a  mercantile  or  manufacturing  enterprise. 

§  33.    Record  of  Contracts  Issued 

The  general  remarks  as  to  the  importance  of  office 
records  of  deeds  issued  apply  also  to  the  record  of  con- 
tracts; but  the  method  of  keeping  this  record  is  somewhat 
simpler,  owing  to  the  fact  that  the  important  particulars  of 
each  contract  are  shown  by  the  entries  in  the  contracts 
sub-ledger. 

It  is  a  general  practice,  from  which  there  should  be  no 
deviation,  to  execute  every  contract  in  duplicate,  the  vendor 
and  the  purchaser  each  receiving  a  copy.  If  this  is  done 
and  the  copies  filed,  numerically  or  alphabetically,  in  the 
order  followed  in  the  contracts  ledger,  and  if  the  contract 
is  entered  on  the  property  ledger,  no  further  record  is 
required. 


PROPERTY    RECORDS  73 

§  34.    Record  of  Options  Granted 

This  record  is  similar  in  all  respects  to  that  for  con- 
tracts, and  it  is  to  be  noted  that  three  distinct  records  are 
required : 

1.  A  copy  of  the  paper  executed. 

2.  Particulars  in  the  sub-ledger. 

3.  Particulars  in  the  property  ledger.  • 

§  35.     Subdivision  Histories 

This  form  is  required  only  in  those  offices  where  many 
different  subdivisions  are  handled.  It  consists  of  a  memo- 
randum book  or  collection  of  loose  leaves,  one  or  more 
pages  being  devoted  to  each  subdivision  and  the  necessary 
particulars  entered  thereon,  as  indicated  in  Form  31. 

Originally  carried  as  Property  No.  275 

2811          NOCATEE  FARMS 
Transfer  to  Nocatee  Purchase  1916  Owned  by  the  Concern 

Commenced  in  1914  report.    Bought  from  Union  Bank.    Tracts  5  acres 

each. 

(No.  275)   3,890  acres  bought  from  Union  Bank  for  $11,670. 
Payable 

October   I,   1914,  $2,000 

Quarterly  payments  $1,000  each,  with  interest  at  8%  per  annum. 

(No.  2811)   160  acres  bought  from  J.  Summer  for  $958.75. 

Up  to  April  30,  1917,  all  profits  based  on  cost  of  $3.00  per  acre. 

There  are  3,890 

160    4,050  acres 

Cost   Bank $11,670.00 

"     Summer 958-75 

Interest  to  Bank 953-IO 

"       estimated  on  un- 
paid balance.        200.00    $13,781.85, 

or,  say 

$4.00  per  acre. 
April  30,  1917    245  tracts  unsold  at  $20.00. . .     $4,900.00 

Purchase  Account $4,438-75 

Form  31.    Subdivision  History 


CHAPTER  VII 

RENT  RECORDS 

§  36.    Record  of  Leases  Given 

In  those  few  offices  in  which  it  is  possible  to  issue  a 
considerable  number  of  leases  of  the  same  general  char- 
acter, either  of  the  methods  outlined  in  §  32  for  the  record- 
ing of  deeds  may  be  followed. 

In  most  cases,  however,  the  forms  and  terms  of  leases 
vary  so  greatly  that  such  a  record  cannot  profitably  be 
kept,  and  it  is  sufficient  to  number  consecutively  all  leases 
given,  as  indicated  in  §  342,  the  original  papers  being  filed 
accordingly  and  a  simple  index  of  all  leases  maintained. 

In  any  event,  whatever  the  nature  of  the  property  leased, 
it  thereupon  becomes  rent-producing,  and  the  lease  should 
accordingly  be  entered  by  its  serial  number  on  the  property 
ledger,  the  rent  register,  and  the  rent  ledger,  together  with 
such  details  of  the  terms  as  may  be  desired.  If  the  rent  is 
payable  at  frequent  intervals,  as  once  a  month,  no  further 
record  is  required;  but  if  the  payments  fall  due  at  longer 
intervals,  as  quarterly,  semiannually,  or  annually,  there  is 
danger  that  they  may  be  overlooked  unless  some  tickler 
record  is  made.  In  such  cases  the  rent  payments  may  be 
indicated  on  the  rent  record  shown  in  Form  32,  or  they 
may  be  entered  on  the  same  form  as  the  interest  receivable, 
but  in  such  manner  as  to  indicate  to  the  bookkeeper  that 
the  entries  refer  to  rents  and  not  to  interest. 

§  37.    Rent  Register  (House  Address  Book) 

This  book  is  invaluable  for  any  office  interested  in  a 
large  number  of  houses  for  rent  or  sale.  It  is  intended  to 

74 


RENT   RECORDS 


75 


contain  a  record  of  all  rentable  properties  owned  by  the 
company,  or  in  which  it  has  an  interest  through  contract, 
mortgage,  or  as  renting  agent.  It  may  be  bound  or  in 
loose-leaf  form.  In  either  case,  it  should  be  indexed  al- 
phabetically and  each  page  be  headed  with  the  name  of  a 
street  or  neighborhood  in  which  the  concern  has  rental  prop- 
erty, the  object  being  to  provide  a  means  for  finding  quickly 


STREET 


NO. 


DtSCBIPTION 


Lot    B.    ,  Map 


OWNER 


REMARKS 


Form  32.    Rent  Record 

all  the  houses  on  any  one  street  and  to  indicate  the  nature 
of  the  interest  involved.  As  it  contains  a  complete  list  of 
all  rentable  properties  in  which  the  concern  is  interested,  it 
forms  the  basis  for  the  work  of  the  rent  department. 

The  loose-leaf  rent  record  or  register  shown  in  Form 
32  has  been  in  use  for  many  years  and  is  self-explanatory. 
If  houses  are  sold  on  time,  this  fact  is  shown  in  the  "Re- 
marks" column,  and  when  the  sale  is  completed,  reference 


76  REAL   ESTATE  ACCOUNTS 

is  made  to  the  serial  number  of  the  mortgage,  contract,  or 
option,  and  a  red  ink  line  is  ruled  through  the  entry. 

If  the  number  of  rentable  houses  is  large,  it  may  be 
advantageous  to  prepare  a  rent  register  board  similar  to 
that  used  for  recording  the  occupancy  of  rooms  in  a  hotel. 
This  board  should  be  large  enough  to  hold  a  card  for  each 
house  on  the  rent  register,  and  so  constructed  that  a  smaller 
card  may  be  inserted  in  front  of,  and  covering  up  the  lower 
part  of,  the  larger  one. 

Each  of  the  larger  cards  (which  may  be  i  X  3  inches) 
bears  along  its  upper  edge  the  address  of  a  house  and  the 
nominal  rent  thereof.  These  cards  are  arranged  on  the 
board  in  order  of  streets,  of  rental  values,  or  of  owners, 
as  may  be  most  convenient.  Upon  a  house  being  rented, 
the  date,  name  of  tenant,  and  particulars  as  to  the  rent  are 
entered  on  one  of  the  smaller  cards  (which  may  be  ^2  X  3 
inches  and  of  a  different  color  from  the  larger  cards),  and 
this  card  is  then  placed  on  the  board  in  front  of  the  larger 
card  in  such  a  way  as  to  leave  exposed  the  address  of  the 
house.  A  board  so  arranged  shows  at  a  glance  every  house 
offered  for  rent,  all  houses  that  are  vacant,  and  all  houses 
that  are  rented,  together  with  the  name  of  the  tenant  and 
other  particulars. 

§  38.    Rent  Receipt  Books 

The  same  principles  that  obtain  with  reference  to  the 
general  receipt  book  (§12)  apply  with  equal  force  to  rent 
receipt  books,  the  main  difference  being  that  the  latter  are 
properly  of  such  size  that  collectors  can  easily  handle  them. 
(See  Form  33.) 

Not  infrequently  an  unscrupulous  tenant  will  claim  to 
have  made  more  payments  than  appear  on  the  cash  book, 
and  may  produce  in  support  of  his  claim  a  receipt  which 
has  been  changed  as  to  amount,  date,  or  name.  The  best 


RENT   RECORDS  77 


THE    ALPHA    LAND    COMPANY 
NOCATEE,  GEORGIA 

$ 191.. 

Received  of 

Dollars, 

being  rent  of  No Street, 

for  .  .to   IQI.. i 


Collector 
(This  receipt  made  in  duplicate) 

Form  jj.    Rent  Receipt 

evidence  against  such  a  claim  is  the  carbon  copy  of  the 
receipt,  which  cannot  be  rebutted. 

§  39.    Report  of  Rent  Collections 

The  rent  report  shown  in  Form  34  was  designed  by 
English  accountants  for  use  in  this  country  in  connection 
with  property  owned  in  England,  a  copy  being  transmitted 
to  the  home  office.  In  such  cases,  or  wherever  the  chief 
office  is  located  at  a  distance  from  the  property,  this  form 
is  valuable  for  tabulating  the  large  number  of  details  to 
be  reported.  Its  practical  value  here,  however,  is  impaired 
by  the  difficulties  which  attend  the  collection  of  arrears  of 
rent,  owing  to  "exemption"  laws  and  the  general  leniency 
toward  delinquent  tenants  which  is  found  in  so  many  states. 

All  offices  employing  rent  collectors  should  require  from 
them  regular  and  uniform  reports  of  their  daily  collections. 
For  this  purpose  the  report  shown  in  Form  35  has  been 
found  convenient.  It  may  be  printed  on  inexpensive  paper, 
bound  in  pads  of  fifty  each,  and  perforated  for  filing  in  a 
"Shannon"  file.  (See  also  Form  49,  §  307.) 


REAL   ESTATE  ACCOUNTS 


RENT   RECORDS 


REPORT  OP  RENT5  C( 

ELECTED 

1Q1 

BOOK 
NO 

STREET 
NO. 

STREET 

TENANT 

OWNED 

~~ 

..           H     — 

~  

== 

Form  35.    Rent  Collector's  Report 

§  40.    Rent  Cash  Book 

For  an  office  handling-  many  rental  houses,  it  is  usually 
convenient  to  keep  all  matters  pertaining  to  rents  out  of 
the  general  cash  book.  An  ordinary  cash  book  may  be 
used  for  this  purpose.  All  rents  received,  taken  direct  from 
the  rent  collectors'  reports,  are  entered  on  the  debit  side, 
while  on  the  other  side  are  entered  all  payments  made  on 
account  of  such  houses  for  repairs,  insurance,  etc. 

Where  such  a  book  is  kept,  it  is  well  to  deposit  all  re- 
ceipts from  rent  as  shown  therein,  in  a  separate  bank  ac- 
count, and  to  charge  against  this  account  all  moneys  paid 
out  for  repairs,  etc.,  using  for  this  purpose  a  check  differ- 
ing from  that  used  in  connection  with  the  general  cash  ac- 
count. At  the  end  of  each  month  the  balance  of  this  ac- 
count is  transferred  to  the  general  fund.  This  method 


go  REAL   ESTATE   ACCOUNTS 

eliminates  from  the  general  cash  book  a  vast  amount  of  de- 
tail which  is  shown  to  better  advantage  by  itself. 

§  41.    Rent  Journal 

The  journal  entries  required  in  connection  with  a  rent 
department  are  few  and  simple,  an  ordinary  journal  with 
three  or  four  columns  meeting  every  requirement.  Such 
entries  relate  almost  entirely  to  the  issue  of  material  from 
the  "yard,"  if  such  is  maintained,  and  to  brokerage  charged 
against  clients,  as  outlined  under  "Rent  Ledger"  in  §  329. 

§  42.    Rent  Ledger 

This  sub-ledger  shows  the  gross  and  net  rent  received 
from  each  building  on  the  rent  roll,  and  is  used  when  the 
items  in  these  accounts  are  too  numerous  for  the  space  pro- 
vided in  the  property  ledger.  The  subject  is  considered 
more  fully  in  §§  329,  330. 

No  special  form  of  ruling  is  required  for  the  rent  ledger, 
but  each  account  should  be  headed  with  the  street  address 
of  the  property  to  which  the  account  refers,  and  be  cred- 
ited with  all  rents  collected  from  that  property  and  debited 
with  all  expenditures  thereon  for  repairs,  water  rent,  etc. 
The  total  of  the  balances  of  all  the  accounts  in  this  sub- 
ledger  will  therefore  agree  with  the  difference  between  the 
Rents  account  and  the  Repairs  account  in  the  general  ledger. 
If  it  is  desired  to  keep  in  the  property  ledger  a  permanent 
record  of  the  income  from  each  piece  of  property,  the  bal- 
ances from  the  rent  ledger  may  be  transferred  periodically 
to  the  appropriate  spaces  in  the  property  ledger. 

Where  there  are  many  houses  paying  rents  weekly,  the 
rent  ledger  shown  in  Form  36  has  been  found  serviceable. 
This  ledger  gives  a  continuous  record  of  each  house,  and 
one  page  will  hold  the  records  of  several  years,  thus  serving 
to  exhibit  changes  of  tenure,  amount  of  repairs  made,  the 


RENT   RECORDS 


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i 

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MONTHLY 
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RENT   RECORDS  83 

tenant   for  whom  they  were  made,   and  regularity  with 
which  rents  have  been  paid. 

For  the  record  of  rents  collected  from  such  properties 
as  office  buildings  and  apartment  houses,  a  tabular  form  of 
rent  ledger,  such  as  shown  in  Form  37,  may  be  used.  The 
simple  addition  of  the  several  columns  for  each  month 
gives : 

1.  Balance  uncollected  on  the  first  of  each  month. 

2.  Total  rents  due  from  tenants  each  month. 

3.  Total  rents  paid  by  tenants  each  month. 

4.  Total  rents  unpaid  at  the  end  of  each  month. 

In  order  to  contain  a  year's  record  of  monthly  rents, 
the  tabular  ledger  will  require  some  forty  columns.  The 
convenience  of  handling  such  a  book  is  greatly  increased 
by  using  "short  leaves,"  which  will  allow  a  book  29  inches 
wide  to  be  used.  The  method  of  dealing  with  the  monthly 
totals  shown  on  such  a  ledger  is  explained  in  Chap- 
ter XXXIV,  "Rents." 

§  43.    Collector's  Pocket  Rent  Ledger 

One  of  the  difficulties  experienced  by  all  rent  collecting 
agencies  is  that  of  keeping  the  collectors  informed  as  to  the 
condition  of  each  account,  particularly  rents  in  arrears. 

For  this  purpose  many  offices  use  a  card  system  similar 
to  that  employed  by  furniture  dealers  and  others  in  con- 
nection with  their  sales  on  the  instalment  plan.  One  such 
card  is  maintained  for  each  house  and  on  it  are  entered  the 
rents  as  they  are  paid.  These  cards  are  then  sorted,  and 
each  day,  or  at  frequent  intervals,  a  certain  number  of  them 
are  given  to  the  collectors,  indicating  to  each  the  houses  at 
which  he  is  to  call.  As  these  calls  are  made,  the  collector 
turns  back  the  proper  cards  to  the  office.  The  record  is 
therefore  necessarily  divided,  and  is  seldom,  if  ever,  all  in 


REAL   ESTATE   ACCOUNTS 


one  place;  also  it  occupies  considerable  space  and  is  subject 
to  loss  and  disarrangement. 

In   order   to   avoid   these   difficulties,   the   "Collector's 
Pocket  Rent  Ledger"  (Form  38)  was  devised,  the  use  of 


.STBEET 


JAN   FEE  MAP.  APR 


MAY  JUN  ML.   A«i  SO?   OCT.    NOV   DCC. 


Form  38.     Pocket  Rent  Ledger 

which  requires  no  explanation.  If  printed  on  thin  paper, 
a  book  about  4^2  Y.  6l/2  inches,  and  about  one-half  inch 
thick,  will  contain  the  records  of  one  thousand  houses  for 
one  year.  The  space  between  any  two  heavy  horizontal 
lines  is  devoted  to  one  house  or  building,  the  blue  lines  in- 
dicating the  first,  second,  third,  fourth,  and  fifth  weeks  of 
each  month.  Each  street  has  one  or  more  pages  allotted 
to  it,  and  by  arranging  the  streets  alphabetically  at  stated 
intervals,  the  book  can  be  kept  in  alphabetical  order  through- 
out its  life.  Being  primarily  for  the  use  of  collectors,  the 
book  contains  no  other  record  than  that  of  rents  collected. 


CHAPTER  VIII 

MISCELLANEOUS    RECORDS 

§  44.    Fire  Insurance  Record 

This  record  is  intended  to  show  the  expiration  of  all 
insurance  policies  in  which  the  concern  is  interested.  Any 
of  the  recognized  forms  of  expiration  register  used  by  fire 
insurance  agents  may  be  adopted,  or  the  system  outlined  in 
§  323  may  be  followed. 

§  45.    Bills  Receivable  and  Bills  Payable 

Bills  receivable  and  bills  payable  books  may  be  of  any 
convenient  form.  They  should  contain  details  of  all  notes 
not  entered  in  the  mortgages  receivable  and  mortgages  pay- 
able ledgers  (§§  18,  19). 

§  46.    Land  Notes 

Some  companies  engaged  in  selling  lands  "on  time" 
make  a  practice  of  taking  payment  in  serial  notes.  When 
this  is  done,  it  is  better  to  enter  such  notes  in  a  record 
separate  from  the  regular  bills  receivable  book.  Probably 
the  most  convenient  form  for  this  record  is  a  modification 
of  the  mortgages  payable  ledger  (Form  9,  §  19),  space 
being  allowed  in  the  heading  for  details  as  to  the  due  date 
and  disposition  of  each  note  in  the  series.  In  preparing 
such  a  form,  it  should  be  remembered  that  such  notes  are 
frequently  hypothecated  or  lodged  with  a  bank  or  trust 
company,  or  placed  in  the  hands  of  an  agent  for  collection. 
Ample  space  should  be  provided  to  record  such  facts,  so 
that  the  location  of  each  and  every  note  may  be  shown. 

85 


86 


REAL    ESTATE  ACCOUNTS 


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MISCELLANEOUS   RECORDS 


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REAL   ESTATE  ACCOUNTS 


• 

~ 


MISCELLANEOUS    RECORDS  89 

§  47.    Mortgage  Interest 

The  necessity  for  a  record  from  which  each  mortgage 
may  be  charged  with  interest  as  it  becomes  payable  is  ob- 
vious. The  only  form  required  for  this  purpose  is  a  book 
made  of  analysis  paper  and  having  at  least  twelve  money 
columns,  one  for  each  month,  as  indicated  in  Form  39.* 

It  is  sometimes  necessary  to  make  monthly  reports  re- 
garding mortgage  interest.  For  such  cases  Form  40,  taken 
from  English  practice,  gives  a  convenient  record  and  is 
particularly  adapted  to  branch  offices  which  have  to  report 
to  the  home  office  or  to  other  branch  offices  located  at  a 
distance.  The  forms  required  for  interest  payable  are 
identical  with  those  for  interest  receivable. 

§  48.     Expense  Account  Analysis  Book 

It  is  essential  to  the  highest  economy  that  the  expense 
account  be  frequently  analyzed,  and  kept  in  such  condition 
as  to  afford  at  all  times  data  for  a  classified  statement  of 
expenses.  This  may  be  done  by  carrying  a  large  number 
of  expense  accounts  in  the  general  ledger,  such  as  salaries, 
stationery,  etc. ;  but  this  method  tends  to  complicate  the 
trial  balance.  For  some  years  past,  many  banks  and  other 
institutions  with  large  expense  accounts  have  made  it  a 
practice  to  charge  all  expense  items  to  one  account,  and 
keep  an  expense  analysis  book,  which  provides  for  a  more 
elaborate  classification  than  can  conveniently  be  carried  in 
a  ledger.  Form  41  gives  a  page  from  such  a  book,  which 
is  of  the  loose-leaf  form  and  well  adapted  to  real  estate 
offices. 


*Some   accountants   claim    that   better    results   can   be    secured   by    dependence 
upon  the  mortgage  record  for  all  information  as  to  interest. 


CHAPTER   IX 

THE  ACQUIREMENT  OF  REAL  ESTATE 

§  49.     Methods  of  Acquiring  Real  Estate 

There  are  at  least  five  legitimate  methods  by  which  the 
control  of  real  estate  may  be  acquired,  viz.:  (i)  by  gift, 
(2)  purchase,  (3)  exchange,  (4)  recovery,  (5)  agency. 

1.  Control  through  gift  occurs  so  rarely  in  business 
that  it  need  not  be  seriously  considered,  for  even  when  a 
gift    is    apparently   made,    some    consideration    is    usually 
passed. 

2.  Purchase  includes  the  majority  of  transfers,  and  the 
method  of  treating  these  in  the  accounts  is  fully  considered 
in  the  present  chapter. 

3.  Simple  exchange  embraces  but  few  instances  of  real 
estate  acquirement;  as  a  rule  some  pecuniary  consideration, 
or  its  equivalent,  is  involved. 

4.  Recovery.     Unfortunately,  most  real  estate  offices 
occasionally  find  it  necessary  to  recover  property  sold  "on 
time"  under  some  form  of  agreement,  the  terms  of  which 
have  not  been  complied  with.    This  involves  the  foreclosure 
of  mortgages  or  cancellation  of  contracts,  although  it  some- 
times happens  that  a  purchaser  voluntarily  reconveys  the 
property  gratuitously  or  for  some  consideration.     In  such 
cases  the  balance  due  on  the  debt,  together  with  interest 
to  the  date  of  recovery,  and  all  expenses  for  taxes,  legal 
charges,  etc.,  should  be  included  in  the  cost  price.    If,  how- 
ever, this  cost  price  exceeds  the  value  of  the  property,  the 
Mortgage  Deficiency  account   (§  229)    should  be  brought 
into  use. 

90 


THE  ACQUIREMENT  OF  REAL   ESTATE  91 

5.  Agency,  as  a  rule,  does  not  convey  title,  but  it  fre- 
quently carries  with  it  the  management  and  sometimes  the 
practical  control  of  property  owned  by  another. 

§  50.    Accounting  Procedure 

In  the  acquisition  of  real  estate  there  are  certain  mat- 
ters with  which  the  accountant  is  particularly  concerned. 
The  more  important  of  these  are : 

1.  The  report  of  the  purchase,  giving  the  particulars  of 
the  acquirement. 

2.  The  documents  involved,  consisting  usually  of  deeds 
of  conveyance,  quitclaim  deeds,  previous  conveyances,  sat- 
isfactions of  mortgages,  tax  receipts,  etc. 

3.  The  certificate  from  the  attorney  as  to  the  title,  or 
the  title  policy  guaranteeing  the  title.     In  large  concerns 
this  is  sometimes  made  on  a  printed  form.     If  an  attorney's 
certificate  is  used,  it  should  give  not  only  the  name  of  the 
owner,  but  a  description  in  sufficient  detail  to  identify  the 
property  positively.      It   should   not  read  merely:      "The 
property  of  John  Doe"  —  a  description  so  indefinite  that 
it  may  be  used  by  fraudulent  persons  to  stretch  a  certificate 
over  titles  which  never  were  submitted  to  the  attorney  for 
examination.     (See  Form  18,  §  24.) 

4.  Any  policies  of  fire  insurance  transferable  with  the 
property.     These  should  be  examined  not  only  as  to  their 
general  terms,  but  particularly  as  to  indorsements  which 
may  be  necessary  on  account  of  changes  of  ownership,  or 
in  connection  with  mortgages,  etc. 

5.  The  entry  on  the  office  records  of  the  land  acquired, 
beginning  with  the  property  index  and  proceeding  as  far 
as  may  be  necessary,  through  the  property  ledger,  mortgage 
ledger,  insurance  record,  etc.    In  the  entries  in  the  property 
ledger,  the  value  of  land  and  of  the  improvements  thereon 
should  be  shown  separately,  as  already  stated'. 


92 


REAL    ESTATE  ACCOUNTS 


§  51.    Entries  Required 

Newly  acquired  real  estate  is  brought  on  the  books 
through  the  cash  book  and  the  journal.  The  cash  book 
entries  represent  merely  cash  paid  for,  or  on  account  of, 
any  purchase.  Such  amounts  are  debited  to  Real  Estate  in 
the  general  ledger,  and  also  to  the  specific  account  in  the 
property  ledger. 

A  full  report  of  each  purchase  should  be  made,  using 
a  blank  for  the  purpose,  similar  to  that  shown  in  Form 
17  (§  25).  The  property  is  then  entered  on  the  property 
index,  and  the  property  sub-ledger  sheet  is  filled  in  and  in- 
serted in  its  proper  place.  If  a  portion  of  the  purchase 
money  is  represented  by  a  mortgage  given  or  assumed  by 
the  purchaser,  this  part  of  the  transaction  will  appear  in 
the  journal  in  substantially  the  following  form: 

Real  Estate $5,ooo 

To  Mortgage  Payable $5,000 

For  mortgage  No on  property  No 


given  or  assumed  by  the  company  and  held 

by 

This  amount  is  posted  in  the  general  ledger  to  the  ac- 
counts shown,  also  in  the  property  ledger,  and  in  the  mort- 
gages payable  sub-ledger. 

§  52.    Mortgages  Payable 

Mortgages  payable  are  of  two  classes,  namely: 

I.  Mortgages  given  by  the  concern  (a)  to  secure  a 
part  of  the  price  paid  for  property,  and  (b)  as 
security  for  money  borrowed  by  the  concern.  In- 
asmuch as  the  latter  may  require  approval  by  the 
stockholders,  or  others,  it  is  sometimes  well  to 
observe  this  subdivision. 


THE  ACQUIREMENT   OF   REAL    ESTATE  93 

2.  Mortgages  already  standing  on  properties,  the 
equities  in  which  have  been  acquired  by  the  con- 
cern through  purchase  or  exchange. 

The  two  classes  are  similar,  and  the  method  of  enter- 
ing them  on  the  books  has  already  been  given. 

§  53-     Legal  Obligations  of  Mortgagor 

There  is,  however,  one  important  distinction  between 
these  two  classes  of  mortgages.  Every  mortgage  imposes 
an  obligation  on  the  maker  to  fulfil  the  conditions  named, 
and  to  make  stipulated  payments  at  definite  times  and  places. 
In  the  case  of  a  mortgage  of  Class  i,  failure  to  live  up  to 
the  obligations  imposed  renders  the  concern  liable  to  cer- 
tain penalties  in  addition  to  forfeiture  of  title.  In  Class  2, 
however,  the  concern  is  not  the  maker  of  the  mortgage,  and 
the  extent  of  the  obligation  incurred  may  depend  in  whole 
or  in  part  upon  the  wording  of  the  deed  conveying  title  to 
the  land. 

Deeds  of  conveyance  usually  contain  a  clause,  more  or 
less  broad,  warranting  the  title  to  the  grantee  (i.e.,  the  pur- 
chaser), and  mentioning  any  existing  liens  such  as  mort- 
gages, unpaid  taxes,  etc.,  which  are  to  be  paid  by  the 
grantee.  If,  then,  after  mentioning  a  specific  mortgage,  the 
deed  merely  continues  with  such  words  as,  "to  which  this 
deed  is  subject,"  or  prefixes  the  description  of  the  mortgage 
by  the  words,  "subject  to  the  following  mortgage,"  but  does 
not  in  terms  obligate  the  purchaser  to  pay  that  mortgage, 
the  exact  extent  of  the  obligation  assumed  by  him  depends 
on  the  circumstances  surrounding  the  particular  transaction. 
Speaking  generally,  in  default  of  payment  of  principal  or 
interest,  the  holder  of  the  mortgage  has  the  usual  recourse 
against  the  original  maker  of  the  mortgage  and  against 
the  property;  but  should  the  property  fail  to  yield  a  sum 
sufficient  to  pay  the  debt  and  the  expenses,  the  holder  can- 


94  REAL   ESTATE   ACCOUNTS 

not  obtain  a  judgment  against  the  purchaser  for  any  de- 
ficiency. 

If,  however,  the  description  of  the  mortgage  is  followed 
by  such  words  as,  "which  mortgage  is  hereby  assumed  by 
the  grantee,"  the  conditions  are  changed.  The  purchaser 
then  assumes  the  obligations  of  the  original  mortgagor ;  and 
should  default  and  foreclosure  ensue,  the  holder  can  obtain 
a  judgment  against  him  for  any  deficiency  remaining  after 
the  foreclosure  sale. 

In  large  transactions,  and  especially  if  values  fall,  or 
if  a  title  proves  faulty,  this  apparently  slight  difference  in 
the  conditions  may  cause  bankruptcy  to  one  of  the  parties. 
Suppose,  for  example,  a  tract  of  land  has  been  acquired 
without  personal  assumption  of  an  existing  mortgage  by 
the  purchaser,  and  some  defect  in  title  is  discovered  which 
renders  further  sale  of  the  property  difficult  or  impossible. 
The  holder  may  then  elect  to  convey  the  property  to  the 
mortgagee,  who  under  such  circumstances  has  no  redress 
against  him.  If  the  value  of  the  property  depreciates  to 
such  an  extent  as  to  be  worth  less  than  the  amount  of  the 
mortgage,  it  could  again  be  transferred  to  the  mortgagee, 
and  the  mortgage  thereby  be  satisfied  so  far  as  the  purchaser 
of  the  property  was  concerned. 

On  the  other  hand,  if  the  grantee  specifically  assumed 
the  mortgage,  he  would  be  forced  to  pay  it  even  though  the 
value  of  the  property  fell  far  below  the  amount  of  the  mort- 
gage. This  is  not  an  imaginary  happening,  as  it  has  often 
been  the  cause  of  serious  loss.  In  one  instance  alone,  in 
the  writer's  experience,  a  loss  of  this  nature  amounted  to 
over  a  quarter  of  a  million  dollars. 

To  the  accountant  the  difference  between  these  two 
classes  of  mortgages  is. the  distinction  between  a  contingent 
and  a  fixed  liability,  for  in  the  first  case  the  liability  may 
cease  to  exist  if  the  property  is  surrendered  to  the  mort- 


THE  ACQUIREMENT   OF   REAL   ESTATE  95 

gagee.    A  discussion  beyond  this  point  would  involve  legal 
matters  rather  than  those  pertaining  to  accounts. 

§  54.    Contracts  Payable 

The  general  principles  applying  to  mortgages  payable 
apply  equally  to  contracts  payable,  except  that  frequently 
in  the  case  of  contracts  there  is  no  legal  obligation  on  the 
part  of  the  purchaser  to  complete  the  purchase — a  failure 
to  do  so  resulting  only  in  the  forfeiture  of  any  money 
already  paid. 

§  55.    Trusts  and  Trustees 

The  acquiring  of  property  frequently  necessitates  some 
form  of  trusteeship  in  connection  with  a  mortgage  given 
or  bonds  issued — a  matter  which  is  touched  upon  in  §  305. 
Only  general  directions  can  be  given  to  cover  this  case.  Full 
details  of  each  trust  should  be  brought  into  the  books  of 
account,  and  such  ledger  accounts  should  be  opened  as  may 
be  necessary  to  show  clearly  and  separately  all  transac- 
tions relating  to  the  principal  and  interest  of  each  trust. 


CHAPTER   X 

PROPERTY  COSTS 

§  56.    The  Elements  of  Cost 

While  the  question  of  holding  or  disposing  of  any  given 
piece  of  property  is  usually  decided  by  the  executive  rather 
than  by  the  accounting  department,  the  decision  often  de- 
pends on  information  furnished  by  the  latter.  This  infor- 
mation relates  largely  to  the  cost  of  the  property — present 
or  future.  This  cost  may  include  one  or  more  of  five  dis- 
tinct classes  of  expenditure,  viz.:  cost  of  (i)  acquirement, 
(2)  holding,  (3)  maintenance,  (4)  operating,  (5)  invest- 
ment. 

1.  The  cost  of  acquirement  has  been  discussed  in  the 
preceding  chapter.    It  represents  the  actual  amount  spent  or 
guaranteed  in  acquiring  the  property,  and  also  includes  the 
cost  of  physical  improvements  added  thereto. 

2.  The  cost  of  holding  includes  those  expenses,  such  as 
interest  and  taxes,  which  are  necessary  to  retain  the  prop- 
erty (not  to  maintain  it),  which  do  not  increase  its  intrinsic 
value,  and  which  are  often  classed  under  the  head  of  "Fixed 
Charges." 

3.  The  cost  of  maintenance  applies  to  improved  prop- 
erty only,  and  consists  chiefly  of  such  items  as  repairs  and 
renewals. 

4.  The  cost  of  operating  applies  only  to  a  limited  num- 
ber of  cases,  such  as  office  buildings  and  apartment  houses, 
and  includes  lighting,  elevator  service,  and  other  similar  ex- 
penditures necessary  to  obtain  the  normal  returns. 

96 


PROPERTY   COSTS  97 

5.  Tjje  cost  of  investment,  as  here  used,  does  not  cover 
the  full  cost  of  acquiring,  but  only  the  actual  cash  outlay 
involved  Strictly  speaking,  this  amount  is  not  a  cost,  al- 
though  it  is  sometimes  convenient  to  regard  it  in  that  light 
when  calculating  profits  derived  or  to  be  expected. 

§  57.    Treatment  of  Costs 

It  will  readily  be  seen  that  the  cost  of  acquirement  dif- 
fers in  one  notable  particular  from  each  of  the  other  costs, 
in  that  it  represents  what  is  known  in  mercantile  and  manu- 
facturing accounts  as  the  "cost  price"  •  -  the  actual  value  at 
some  definite  moment;  while  no  item  of  any  of  the  other 
"costs"  affects  the  intrinsic  value  of  the  property.  These 
differences  in  the  five  classes  of  costs  are  so  radical  as  to 
necessitate  an  entirely  different  treatment  for  each  on  the 
books  of  account.  Provision  for  such  treatment  is  made  on 
property  ledgers  shown  in  Forms  20  and  21  (§  26),  where 
the  main  accounts  show  the  cost  of  acquirement  of  each 
piece  of  property,  the  total  of  which  must  agree  with  the 
Real  Estate  account  in  the  general  ledger. 

§  58.    Cost  of  Improvements 

The  only  addition  to  the  original  cost  price  of  property 
is  the  cost  of  improvements,  a  record  of 'which  is  provided 
for  in  the  property  ledger  main  account.  Such  items  may 
properly  be  charged  directly  from  the  cash  book  to  Real 
Estate,  or,  as  is  sometimes  more  convenient,  they  may  be 
charged  to  "Improvements"  account,  which  is  transferred 
to  Real  Estate  account  at  the  close  of  each  fiscal  period. 
The  latter  plan  has  the  advantage  of  showing  the  total  of 
such  expenditures  in  one  amount  on  each  monthly  trial  bal- 
ance. If  it  is  adopted,  each  item  should  at  once  be  posted 
to  its  proper  account. in  the  property  ledger,  and  the  total 
balance  of  these  accounts  will  then  equal  the  sum  of  the 


Cjg  REAL   ESTATE   ACCOUNTS 

balances  of  "Real  Estate"  and  "Improvements"  in  the  gen- 
eral ledger. 

§  59.    Repairs,  Renewals,  and  Improvements 

From  the  accountant's  standpoint,  there  are  few  ac- 
counts on  the  books  which  require  more  careful  examina- 
tion than  the  Improvements  or  Betterments  account — a 
condition  applying  equally  to  all  businesses  in  which  the 
maintenance  of  any  physical  structure  plays  a  part.  There 
is  frequently  considerable  difficulty  in  drawing  the  line  be- 
tween the  expense  item  of  repairs  or  renewals  and  the  asset 
item  of  improvements  or  betterments.  This  difficulty  is  still 
increased  by  the  general  tendency  among  officials  of  all 
ranks  to  increase  assets  rather  than  expenses.  The  clerk 
in  charge  of  a  rental  department  is  as  desirous  of  keeping 
low  his  ratio  of  repairs  to  rents,  as  is  the  manager  report- 
ing to  the  stockholders;  whereas  the  stockholders  them- 
selves would,  sometimes  at  least,  charge  everything  to  as- 
sets and  nothing  to  repairs,  for  by  so  doing  these  asset 
increments  might  be  quickly  turned  into  dividends  and  in 
this  form  reach  their  pockets. 

If  a  list  were  made,  commencing  with  undoubted  im- 
provements and  gradually  changing  to  undoubted  repairs, 
nothing  would  be  easier  than  to  classify  the  items  at  each 
end  of  the  list,  while  it  would  be  extremely  difficult  to 
classify  properly  some  of  the  items  in  the  middle.  The 
building  of  a  new  house  on  a  vacant  lot  or  the  digging  of  a 
drainage  canal  through  a  swamp  are  beyond  all  doubt  "im- 
provements," while  the  replacing  of  a  pane  of  window 
glass  blown  out  by  the  wind  is  clearly  "repairs."  The  dif- 
ficulty in  classification  is  not  merely  that  of  finding  a  defini- 
tion, but  of  applying  the  definition  when  found.  The  final 
decision  in-  each  case  must  necessarily  depend  upon  the 
conditions. 


PROPERTY   COSTS 


99 


§  60.    Definitions 

Repair  is  the  "restoration  to  a  sound  or  good  state  after 
decay,  waste,  injury,  or  partial  destruction;  it  is  the  supply 
of  loss." 

Betterment  is  defined  under  American  law  as  "an  im- 
provement of  real  property  which  adds  to  its  value  other- 
wise than  by  mere  repairs." 

Improvement  is  defined  as  "a  betterment ;  that  by  which 
the  value  or  excellence  of  a  thing  is  enhanced ;  a  beneficial 
or  valuable  change  or  addition.  An  improvement  in  real 
property  is  something  done  or  added  to  it,  which  increases 
its  value,  as  cultivation,  or  the  erection  of  or  addition  to 
buildings." 

The  following  definitions  are  taken  from  the  rules  of 
the  Interstate  Commerce  Commission : 

"Additions  include  additional  structures,  facilities,  or 
equipment,  not  taking  the  place  of  anything  previously 
existing." 

"Betterments  include  the  enlargement  or  improvement 
of  existing  structures,  facilities,  or  equipment,  or  a  proper 
proportion  of  the  cost  of  new  structures,  facilities,  or  equip- 
ment of  an  improved  or  higher  class,  taking  the  place  of 
others  previously  existing." 

§  61.    Repairs 

The  definition  of  repairs  given  in  the  preceding  section 
is  clean-cut  and  definite;  but  even  here  difficulty  may  be 
experienced,  particularly  in  connection  with  the  time  when 
repairs  are  made.  In  the  case  of  the  renewal  of  the  roof  of 
a  dwelling,  if  that  dwelling  has  been  erected  by  the  concern 
and  carried  for  a  considerable  period  on  its  books,  the  mat- 
ter is  clearly  one  of  repairs.  On  the  other  hand,  if  the 
concern  bought  an  old  house  knowing  that  such  repairs  were 
required  immediately,  the  cost  of  the  new  roof  would  be 


I00  REAL   ESTATE   ACCOUNTS 

chargeable  to  Improvements,  for  the  poor  state  of  repair 
of  the  building  was  undoubtedly  considered  when  the  price 
of  the  property  was  agreed  upon. 

Consider,  however,  a  case  between  these  two.  A  dwell- 
ing supposed  to  be  in  good  condition  is  bought  at  a  fair 
market  price.  After  a  couple  of  years  it  is  found  that  a 
new  roof  is  necessary.  To  what  shall  its  cost  be  charged? 
The  property  is  already  on  the  books  at  a  fair  and  proper 
value.  The  new  roof  adds  nothing  to  the  supposed  con- 
dition of  the  building,  and  the  cost  thereof  may  bring  the 
total  cost  of  the  house  fully  up  to,  or  even  above,  the  price 
at  which  it  could  be  sold.  In  such  case  the  Repairs  account 
would  be  the  proper  place  for  the  entry. 

The  above  remarks  are  based  on  the  assumption  that 
the  new  roof  is  of  the  same  character  as  the  old  one.  If 
the  new  roof  is  of  tiling  or  slate  and  the  old  one  was  of 
shingles,  the  difference  between  the  cost  of  a  new  shingle 
roof  and  a  new  tile  roof  is,  without  doubt,  chargeable  to  Im- 
provements account. 

Professor  Cole,  in  "Accounts,  Their  Construction  and 
Interpretation,"*  deals  with  another  difficulty,  encountered 
when  a  building  is  altered  for  its  tenant,  who,  in  considera- 
tion of  these  alterations,  pays  an  increased  rental,  but  leaves 
at  the  end  of  a  year  and  the  new  tenant  requires  the 
premises  restored  to  their  original  condition.  If  such 
changes  were  continued,  and  the  cost  charged  to  "Improve- 
ments," the  result  would  be  a  fictitious  value,  ultimately  ex- 
panding to  infinity.  This  question  is  fully  dealt  with  by 
Professor  Cole,  and  further  discussion  here  is  unnecessary. 

This  brings  us  directly  to  the  difficulties  contained  in 
the  definitions  of  "improvements"  and  "betterments."  A 
change  in  property  which  may  result  in  an  increase  in  value 
or  excellence  for  one  purchaser,  may  destroy  its  value  or 

•Chapter  VII. 


PROPERTY   COSTS  IOI 

excellence  for  another.  Examples  could  easily  be  multiplied, 
but  enough  has  been  said  to  show  that,  given  full  knowledge 
of  any  particular  case,  honesty  and  good  judgment  will 
direct  the  charges  to  their  appropriate  place.  This  disposal 
of  the  question,  however,  only  emphasizes  the  necessity  for 
a  careful  scrutiny  on  the  part  of  an  auditor  to  see  not  only 
that  subordinates  or  principles  have  made  fair  distributions, 
but  that  no  one  is  misled  or  deceived. 


CHAPTER    XI 
CARRYING   CHARGES 

§  62.    Interest  and  Taxes 

It  is  to  be  noted  that  the  cost  of  carrying  property  dates 
from  the  time  the  purchase  price  is  paid  or  guaranteed. 
The  mere  holding  necessitates  the  use  and  the  tying  up  of 
capital  which  otherwise  could  be  earning  interest;  and 
capital  invested  in  property  is  as  worthy  of  its  hire  as  is  a 
contractor  erecting  a  building  thereon.  Again,  every  owner 
of  property  in  civilized  countries  receives,  nominally  at 
least,  benefits  and  protection  from  one  or  more  govern- 
mental bodies,  and  his  property  is  required  to  contribute 
its  quota  of  the  cost  of  providing  such  benefits  and  protec- 
tion. This  is  paid  in  the  form  of  taxes.  Interest  and  taxes, 
therefore,  comprise  the  total  cost  of  holding  unimproved 
property,  and  this  gives  rise  to  the  question:  Should  interest 
and  taxes  be  included  in  the  cost  of  property? 

The  writers  on  accounting  subjects  are  rather  indefinite 
in  their  answers  to  this  question.  Pixley,*  for  example, 
while  stating  that,  theoretically,  the  cost  of  real  estate  should 
be  confined  to  the  purchase  price,  so  that  even  legal  expenses 
incurred  in  acquirement  should  not  be  included  in  cost, 
admits  that  the  usual  custom  is  to  include  such  items  and 
enters  no  protest  against  it.  Many  of  the  older  authors 
pass  the  matter  by,  almost  without  remark.  Recent  writers, 
however,  have  treated  the  matter  fully,  and  perhaps  no 
clearer  exposition  of  both  sides  of  the  question  can  be  found 


'"Auditors,  Their  Duties  and  Responsibilities." 

I O2 


CARRYING   CHARGES  103 

than    that    given   by    Nicholson    in    his    work    on    "Cost 
Accounting."* 

§  63.    Interest  as  Part  of  Cost 

In  this  country,  if  a  construction  company  undertakes 
to  build  a  railway,  it  is  permitted  by  law  to  include  in  con- 
struction expenses  "interest  on  loans  effected  and  on  notes 
issued  for  construction  purposes."  A  similar  practice  is 
allowed  in  other  countries. 

From  this  it  has  been  argued  that  a  company  buying 
land  for  development  purposes  is  entitled  to  include  in  the 
cost  of  the  land  the  interest  it  may  pay  on  loans  which  it 
makes  in  order  to  raise  the  purchase  money.  This,  how- 
ever, does  not  seem  to  be  a  logical  position,  for  if  interest 
is  charged  on  such  loans,  which  are  practically  a  part  of  the 
purchase  money,  why  should  not  interest  be  charged  on 
the  entire  price? 

It  should  be  remembered  that  the  holdings  of  a  concern 
dealing  in  real  estate  are  its  stock  in  trade  and  form  its 
inventory,  and  are  subject  to  the  basic  rules  governing  any 
other  stock  in  trade.  A  merchant  would  not  add  interest 
to  the  purchase  price  of  his  goods  when  taking  their  cost 
value  in  an  inventory,  nor  is  it  usual  for  an  investor  buying 
stocks,  bonds,  or  other  security,  to  add  the  interest  thereon 
to  the  original  price  and  call  this  total  the  cost  of  the 
securities.  Any  merchant  following  such  a  course  would 
be  anticipating  his  profits — a  practice  inconsistent  with  good 
business. 

The  fact  that  an  individual  or  a  corporation,  not  having 
sufficient  money  to  pay  the  full  purchase  price  of  an  article, 
must  borrow  the  money,  does  not  in  any  way  change  the 
value  of  the  article  bought,  although  the  fact  that  interest 
must  be  paid  on  borrowed  money  may  apparently  increase 

*"Cost  Accounting,  Theory  and  Practice,"  by  J.   Lee  Nicholson, 


I04  REAL    ESTATE   ACCOUNTS 

the  cost.  On  the  other  hand,  if  interest  on  a  part  of  the 
purchase  price  is  charged  to  cost,  then  interest  on  the 
whole  price  should  be  so  charged,  for  the  simple  reason 
that  the  money  which  the  purchaser  invested  in  property 
would,  presumably,  if  not  so  invested,  have  been  used  for 
income-producing  purposes. 

The  fallacy  of  charging  interest  on  the  borrowed  money 
only,  may  be  shown  by  an  example:  Suppose  a  concern 
finds  at  the  end  of  a  month  that  it  has  $5,000  in  bank ;  that 
$5,000  on  a  piece  of  property  purchased  a  year  ago  is  now 
due;  and  that  it  must  also  pay  salaries  to  the  amount  of 
$5,000.  It  therefore  goes  to  the  bank  and  borrows  $5,000. 
Is  there  any  good  reason  why  the  interest  on  this  loan 
should  be  charged  to  the  cost  of  the  property?  Both  the 
debts  are  valid  obligations ;  either  one  of  them  could  be  paid 
without  borrowing,  but  if  the  money  in  bank  is  used  for 
the  payment  on  the  land,  a  like  sum  must  be  borrowed  to 
pay  the  salaries,  and  interest  on  such  a  loan  is  chargeable  to 
"Income."  Who  can  say  to  which  purpose  the  bank  balance 
was  devoted,  or  to  which  the  borrowed  money  ? 

Possibly  the  fact  that  interest  on  money  borrowed  for 
current  expenses  must  be  deducted  from  "earnings,"  while 
interest  on  money  borrowed  to  pay  for  land  may  be 
absorbed  in  the  Real  Estate  account,  and  thereby  apparently 
increase  assets  rather  than  expenses,  explains  the  practice 
of  including  such  interest  in  the  cost  of  acquirement. 

§  64.    Inventories  at  Cost 

The  auditor  on  inquiring  as  to  the  cause  of  the  sudden 
increase  in  values  shown  by  the  Real  Estate  account  is  often 
told  that  "the  land  was  valued  by  three  experts,  and  that 
the  new  figures  represent  the  lowest  valuation."  Still,  the 
land  is  not  yet  sold.  Again,  a  conservative  merchant  who 
has  on  hand  1,000  barrels  of  flour  which  cost  $8  each,  would 


CARRYING   CHARGES  105 

not  enter  them  in  his  inventory  at  an  increased  price,  even 
though  a  hundred  experts  might  truly  testify  that  the  flour 
was  worth  $10  a  barrel.  Why  should  a  different  practice 
obtain  in  the  case  of  real  estate  ? 

This  is  one  of  the  questions  which  must  ultimately  be 
decided  by  the  circumstances  of  each  case.  As  a  general 
rule,  especially  in  companies  where  real  estate  forms  the 
main  asset,  the  safe  and  proper  plan  is  to  take  the  real 
estate  at  its  actual  cost,  and  to  adhere  strictly  to  the 
recognized  principle  that  inventories  should  always  be  based 
on  such  cost. 

The  balance  sheet,  and  therefore  the  Property  account 
in  the  general  ledger,  should  always  show  the  actual  cost  of 
real  estate,  that  is,  the  cost  of  acquirement.  Most  people, 
when  examining  a  balance  sheet,  do  not  consider  interest 
as  a  part  of  the  cost,  and  would  therefore  be  misled  to  some 
extent  if  it  were  included  in  the  Real  Estate  account. 

The  cost  of  acquiring  real  estate  will  properly  include 
those  expenditures  which  materially  enhance  the  value  of 
the  property,  such  as  physical  improvements;  but  the  mere 
payment  of  interest  does  not  in  any  way  affect  that  value, 
and  should  not  be  treated  as  if  it  did. 

§  65.    Interest  on  Cost 

There  is  another  phase  of  the  interest  question  to  be  con- 
sidered. When  land  is  bought  with  the  idea  of  holding  it 
for  a  future  rise  in  value,  the  owner  must  necessarily  take 
into  consideration  interest  on  the  purchase  price.  It  is  not 
an  uncommon  thing  to  hear  that  a  man  who  bought  a 
piece  of  real  estate  ten  years  ago  for  $1,000  and  sells  it 
today  for  $1,200,  has  made  $200;  whereas  interest  on 
$1,000  for  ten  years  at  6%  amounts  to  $600.  In  such  cases 
there  is  some  reason  for  considering  the  interest  as  a  part 
of  the  cost,  but  even  then  it  is  a  better  plan  to  carry  the 


I06  REAL    ESTATE   ACCOUNTS 

interest,  and  also  the  taxes,  etc.,  in  separate  accounts,  the 
total  of  which,  added  to  the  original  price,  will  show  tlie 
cost  at  any  given  date. 

On  the  other  hand,  when  improved  property  is  bought 
and  rented,  the  owner,  in  estimating  his  profits,  does  not 
add  to  the  original  cost  the  interest  accruing  since  the  pur- 
chase price  was  paid.  This  indicates  that  the  method  of 
treating  interest  in  connection  with  cost  depends  to  some 
extent  on  the  purpose  for  which  the  property  is  held. 

Speaking  generally,  interest  ard  taxes,  being  fixed  and 
beyond  the  control  of  the  owner,  should  be  charged  against 
income  in  the  balance  sheet,  for  they  represent  that  which 
is  past,  while  profits  are  among  the  things  hoped  for.  This 
periodic  charging  up,  however,  does  not  in  any  way  preclude 
the  keeping  of  such  records  of  these  expenditures  as  will 
instantly  show  the  true  history  of  any  property.  Memoranda 
accounts  for  this  purpose  are  fully  provided  for  in  the 
property  records  which  are  shown  in  Forms  20  and  21 
(§  26). 

In  instances  where  tracts  of  land  are  held  by  develop- 
ment companies  for  purposes  of  subdivision,  the  best  prac- 
tice is  to  leave  out  of  the  books  of  account  all  interest  on 
the  investment,  except,  of  course,  such  interest  payable  as 
accrues  upon  mortgages  payable,  and  this  interest  should 
be  written  off  to  Profit  and  Loss  whenever  the  books  are 
closed.  This  avoids  adverse  criticism,  as  well  as  the 
possibility  of  misleading  the  interested  parties. 

§  66.    Treatment  of  Interest  Charges 

The  foregoing  discussion  may  be  summarized  as  follows: 
Interest  on  purchase  money,  even  though  this  be  borrowed 
in  whole  or  in  part,  is  not  ordinarily  a  proper  charge  against 
cost.  Interest  on  borrowed  money,  according  to  the  best 
authorities,  may  be  included  in  the  cost  of  construction, 


CARRYING  CHARGES  107 

during  construction  or  development;  but  such  charges  must 
stop  the  instant  construction  is  completed,  and  thereafter 
all  interest  becomes  a  debit,  not  against  "Investment"  or 
"Capital"  account,  but  against  "Income."  At  the  same 
time,  the  records  should  be  so  arranged  as  to  afford  full 
information  regarding  such  items  as  interest  and  taxes.  In 
other  words,  the  balance  sheet  should  be  based  on  the  cost 
of  acquirement,  while  the  subsidiary  records  should  show 
also  the  cost  of  holding. 

§  67.    Depreciation  as  Affecting  Cost 

One  other  matter  affects  the  cost  of  holding,  and  that  is 
the  depreciation  of  buildings.  This  subject  presents  some 
complications  and  requires  consideration  in  some  detail. 
It  is  therefore  treated  separately  and  at  length  in  Chapter 
XXXII. 

§  68.    Taxes 

The  principles  which  apply  to  interest  are  in  a  general 
way  applicable  to  taxes — with  the  marked  difference  that 
the  actual  payment  of  taxes  on  the  whole  assessed  value 
admits  of  no  evasion.  Though  a  necessary  expenditure  as 
well  as  expense,  taxes  do  not  enhance  the  value  of  property 
and  should  be  treated,  as  a  rule,  in  the  same  manner  as 
interest. 

Possibly,  in  the  treatment  of  taxes  and  assessments  upon 
subdivision  property,  the  clearest  way  is  to  keep  distinct 
the  taxes  upon  each  subdivision  for  a  given  year ;  and  at  the 
closing  of  the  books,  after  calculating  the  earned  or  realized 
profits  on  this  particular  subdivision,  to  deduct  from  that 
profit  the  taxes  which  apply  to  the  year  under  consideration. 
This  brings  them  eventually  into  the  Profit  and  Loss  ac- 
count, and  gives  the  same  final  result  as  if  all  taxes  were 
charged  direct  to  Taxes  account,  which  also  is  written  off 


I08  REAL   ESTATE  ACCOUNTS 

as  a  whole  to  the  debit  of  Profit  and  Loss  account.  The 
plan  first  outlined  has  the  advantage  of  showing  exactly  the 
net  results  yielded  by  each  subdivision.  (See  also  Chapter 
XXXV.) 

§  69.    Assessments 

The  word  "assessment"  is  here  used  in  a  limited  sense, 
referring  only  to  such  charges  as  do  not  necessarily  enhance 
values.  The  term  is,  however,  frequently  applied  to  the 
owner's  share  of  the  expense  of  laying  pavements,  sewers, 
water  mains,  etc.  In  such  cases,  it  is  evident  that  the 
amount  should  be  charged  to  Improvements  and  be  treated 
accordingly,  for  the  paving  of  a  street  or  the  draining  of  a 
neighborhood  increases  directly  the  value  of  all  abutting 
properties. 

§  70.    Cost  of  Maintenance  and  Operation 

The  case  of  an  office  building  may  now  be  considered, 
as  differing  as  widely  as  possible  from  unimproved  proper- 
ties. Here  the  income  is  from  "rent."  As  to  expenditures, 
we  have  in  addition  to  those  already  considered,  another 
and  quite  distinct  class,  consisting,  first,  of  repairs  and 
cost  of  maintenance;  and  second,  of  such  charges  as  those 
for  engineer  and  janitor  service,  and  for  light,  power, 
elevators,  etc.  All  these  expenditures  are  necessitated  solely 
by  the  fact  that  certain  conditions  must  be  complied  with 
before  rents  can  be  collected,  and  they  are  classified  as  the 
costs  of  maintenance  and  operation. 

This  difference,  however,  in  no  way  affects  the  principles 
already  laid  down  in  discussing  unimproved  property,  or 
the  procedure  to  be  followed,  except  that  the  memorandum 
accounts  in  the  real  estate  ledger,  dealing  with  improved 
property,  should  show  the  net  income  derived  from  this 
source. 


CARRYING   CHARGES 

§  71.    Profits  on  "Value"  and  "Investment" 

In  improved  properties  another  distinction  is,  however, 
quite  commonly  found.  The  profit  on  the  value  of  the 
property  frequently  differs  from  the  profit  on  the  actual 
cash  investment.  This  is  clearly  shown  by  the  following 
example : 

If  an  office  building  be  bought  for  $500,000,  of  which 
$200,000  is  represented  by  a  mortgage  bearing  interest  at 
5%  per  annum,  and  the  net  rents  are  $60,000,  the  taxes 
and  insurance  $10,000,  and  the  cost  of  maintenance,  re- 
pairs, service,  insurance,  etc.,  $15,000,  then  the  net  income 
is:  $60,000  —  ($10,000  +  $15,000)  =  $35,000,  which  is 
J%  on  the  cost  of  acquiring;  whereas  the  return  on  the 
cash  invested  is  $35,000  —  ($%  on  $200,000)  =  $25,000, 
which  is  8.3%  on  the  cash  invested. 

These  figures  show  the  importance  of  recording  clearly 
and  in  one  place  all  particulars  regarding  each  piece  of 
property,  in  such  a  manner  as  is  provided  for  in  the  real 
estate  ledgers. 


CHAPTER    XII 

SALES    OF   REAL   ESTATE 

§  72.    Time  Sales 

From  the  fact  that  real  property  is  usually  sold  with 
some  form  of  guaranty  on  the  part  of  the  vendor,  thereby 
creating  a  contingent  liability,  it  is  fully  as  necessary  that 
the  records  should  show  exactly  the  disposition  of  each 
property  as  it  is  that  they  show  the  method  of  its  acquire- 
ment and  the  cost  of  holding  it.  The  manner  of  disposition 
is  twofold,  viz.:  (i)  time  sales;  (2)  final  sales. 

The  particulars  for  time  sales  are  taken  from  the  report 
of  sale  (Form  17,  §  25)  and  entered  on  the  books,  such 
entries  closing  the  Real  Estate  account  for  the  property  in- 
volved. This,  however,  does  not  entirely  relieve  the  ac- 
countant of  responsibility,  for  he  should  see  that  the  ab- 
stracts are  retained  until  the  final  payment  is  made,  and 
that  insurance  policies  and  similar  papers  are,  properly 
indorsed  and  delivered  to  the  owner  or  mortgagee,  as  the 
case  may  demand. 

§73.    Final  Sales 

When  property  is  finally  disposed  of  and  completely  paid 
for  in  cash  or  its  equivalent,  it  is  well  to  enter  on  the  face 
of  the  Real  Estate  account  for  the  particular  piece  of  prop- 
erty sold,  an  indorsement  in  substantially  the  following 
form: 

"Deed  delivered  to (name) 

on (date) ,  together  with  abstract, 

insurance  policies,   etc."    (specifying  each   paper   so 

delivered). 

110 


SALES   OF   REAL   ESTATE 

The  making  of  such  entries  saves  much  time  later.  It 
is  all  the  more  important  because  such  papers  are  frequently 
delivered  not  to  the  purchaser  himself,  but  to  some  agent  or 
attorney,  so  that  by  the  time  they  reach  the  purchaser  they 
have  passed  through  several  hands;  and  it  is  essential  that 
the  concern  be  able  to  show  from  its  records  the  delivery  of 
all  the  necessary  papers. 

§  74.    Form  of  Entries  Relating  to  Sales  of  Property 

To  illustrate  the  entries  required  on  selling  a  piece  of 
property,  assume  the  case  of  property  sold  to  Richard 
Haines  for  $1,200,  the  cost  price  being  $1,000.  There  are 
four  distinct  methods  of  payment,  viz.:  (i)  cash  sale;  (2) 
mortgage  as  part  payment;  (3)  payment  by  cash,  note, 
and  mortgage — building  to  be  erected  by  vendor;  (4)  sale 
on  contract. 

i.  If  a  cash  sale  is  made,  the  amount  of  $1,200  will  be 
posted  from  the  cash  book  to  the  credit  of  Property  account 
in  the  general  ledger,  and  to  the  credit  of  the  account  of  this 
particular  lot  in  the  property  ledger.  This  will  cause  the 
latter  to  show  a  credit  balance  of  $200,  which  may  be 
allowed  to  remain  until  the  books  are  closed  and  a  balance 
sheet  prepared.  This  amount,  with  other  similar  amounts, 
is  then  carried  to  the  Gain  on  Sales  account.  Or  the  balance 
of  $200  might  be  carried  at  once  to  Gain  on  Sales  account 
without  passing  through  the  Property  account.  The  Gain 
on  Sales  account  is  eventually  closed  into  Profit  and  Loss 
account,  as  will  be  described  in  Chapters  XIII  to  XV 
inclusive. 

2.  Suppose  that  instead  of  paying  $1,200  in  cash, 
Haines  makes  a  cash  payment  of  $500  and  gives  a  mortgage 
for  $700.  The  cash  would  be  credited  as  in  the  above 
instance,  and  the  journal  entry  might  be  formulated  as 
follows: 


II2  REAL   ESTATE  ACCOUNTS 

Mortgage  Receivable $700 

To  Property  Account $500 

"    Gain  on  Sales 200 

For  mortgage  receivable  No made  by  Richard 

Haines  as  part  payment  for  property  No 

The  postings  are  made  to  the  general  ledger,  and  a  new 
account  showing  all  particulars  of  the  mortgage  is  opened 
in  the  mortgages  receivable  ledger. 

3.  Again,  suppose  that  Haines  bought  the  same  lot,  the 
concern  agreeing  to  erect  thereon  a  building  estimated  to 
cost  $600,  for  all  of  which  Haines  is  to  pay  $2,000,  made  up 
of  a  cash  payment  of  $500,  a  note  for  $200  payable  on  com- 
pletion of  the  building,  and  a  mortgage  for  $1,300.  The 
cash  entries  would  be  the  same  as  before,  and  the  journal 
entry  would  be  as  follows: 

Mortgages  Receivable $1,300 

Bills  Receivable 200 

To  Property  Account $500 

"    Building — Richard  Haines 600 

'    Gain  on  Sales 400 

In  addition  to  the  entries  made  in  the  last  case,  a  new 
account  is  opened  in  the  general  ledger,  entitled  "Building 
— Richard  Haines,"  which  is  credited  with  $600,  the  esti- 
mated cost  of  the  building.  This  account  will  be  debited 
with  expenditures  on  account  of  the  building  as  they  are 
made.* 

Care  should  be  taken  to  see  that  the  estimated  cost  of 
the  building  is  for  an  amount  sufficient  to  cover  the  entire 
cost  of  the  building,  for  there  is  sometimes  a  tendency  to 
make  the  estimate  too  small  for  the  sake  of  increasing  the 
apparent  profit  on  the  sale.  This  will  be  considered  further 


•The  transaction  mentioned  under  (3)  might  be  criticized  from  a  business 
point  cf  view.  However,  such  sales  do  occur  frequently  and  in  various  localities, 
and  this  case  is  discussed  here  simply  to  show  how  to  deal  with  the  problem 
whenever  it  arises. 


SALES  OF  REAL  ESTATE          113 

when  we  take  up  the  accounts  appearing  on  the  trial  balance. 
(See  Chapters  XXV,  XXVI.) 

Another  point  to  be  considered  is  the  note  given  by 
Haines,  which  is  payable  on  completion  of  the  house.  This 
note  should  be  drawn  to  fall  due  on  a  fixed  day,  which  should 
be  set  sufficiently  far  ahead  to  insure  ample  time  for  the 
completion  of  the  building. 

4.  Suppose  the  property  were  sold  on  "contract," 
Haines  buying  the  property  for  $1,200;  $200  in  cash  and  a 
contract  for  the  balance.  The  transaction  is  entered  in  the 
journal  as  follows: 

Contracts $1,200 

To  Property  Account $1,200 

For   contract   No made   with    Richard 

Haines  on  property  No 

After  posting  to  the  general  ledger,  a  new  account  would 
be  opened  in  the  contracts  sub-ledger,  and  all  particulars 
entered  therein  as  shown  above.  The  cash  payment  in  this 
case  is  credited  to  "Contracts." 

It  will  be  noted  that  in  the  case  of  a  contract  the  journal 
entry  is  for  the  total  amount  of  the  purchase,  the  first  cash 
payment  being  credited  to  Contracts  (not  to  Property  ac- 
count) ;  while,  in  the  case  of  a  mortgage,  the  journal  entry 
is  for  that  part  of  the  purchase  price  remaining  unpaid. 
Although  this  appears  simple,  the  writer  has  found  a  number 
of  bookkeepers  who  have  difficulty  in  keeping  this  distinction 
clearly  before  them,  and  who  are  therefore  always  in  some 
doubt  as  to  what  account  should  be  credited  with  the  cash 
payment  when  a  portion  of  the  purchase  price  is  represented 
by  some  form  of  deferred  payments. 

To  emphasize  this  matter,  if  cash  and  a  mortgage  are 
given  by  a  purchaser,  this  first  cash  payment  (which  added 
to  the  amount  of  the  mortgage,  makes  the  total  price)  is  to 


REAL   ESTATE  ACCOUNTS 

be  credited  to  Property  account.  In  the  event  of  a  sale  with 
part  cash  under  a  contract,  the  amount  of  the  first  payment 
is  shown  on  that  contract,  which  is  not  the  case  with  a 
mortgage.  As  the  contract  shows  on  its  face  the  total 
amount  of  the  principal,  this  amount  is  debited  to  the  ac- 
count of  the  contract,  and  all  payments,  from  first  to  last, 
must  be  credited  to  the  contract. 

§  75.    Legal  Expenses 

It  is  the  rule  in  some  offices  to  charge  each  mortgagor 
with  a  fixed  sum  to  cover  the  legal  expenses  incurred  in 
obtaining  an  attorney's  opinion  on  title,  in  drawing  the 
papers,  etc.  As  this  amount  increases  the  principal  of  the 
mortgage  on  one  side,  and  is  credited  to  Legal  Expense,  it 
may  well  be  included  in  the  journal  entry  covering  the 
transaction. 

§  76.    Surrender  of  Contract 

A  word  of  caution  may  be  given  as  to  the  importance  of 
seeing  that  all  proper  formalities  are  complied  with  before  a 
deed  is  delivered.  This  applies  not  only  to  the  receipt  of 
the  actual  consideration,  which  may  involve  the  execution 
of  a  mortgage,  but  also  to  the  surrender  of  any  outstanding 
contract. 

It  has  been  shown  that  a  contract  carries  with  it  an 
obligation  on  the  part  of  the  owner  of  the  land  to  convey 
title  to  it  upon  the  fulfilment  of  certain  conditions.  Such 
contracts  are  usually  transferable,  and  before  delivering  a 
deed,  the  owner  should  receive  back  the  original  contract 
in  order  to  insure  him  against  a  subsequent  claim  there- 
under. If  this  contract  is  lost,  the  purchaser  should  give  a 
written  undertaking  stating  that  the  deed  is  received  in 
completion  of  the  said  contract,  and  absolving  the  owner 
from  all  further  liability.  It  is  a  safe  practice  to  insert  in 


SALES  OF  REAL  ESTATE          115 

such  a  deed  a  clause  stating  that  it  is  issued  in  accordance 
with  the  terms  of  a  specified  contract,  especially  when  the 
original  contract  has  been  transferred  by  the  original  pur- 
chaser, who  might,  in  some  states,  present  a  claim  against 
the  vendor. 

It  should  be  noted,  however,  that  the  custom  of  return- 
ing the  original  contract  to  the  owner  is  by  no  means  uni- 
versal, and  where  the  custom  does  not  exist,  it  is  obvious 
that  the  above  precautions  do  not  apply. 


CHAPTER   XIII 

PROFITS  FROM  REAL  ESTATE  SALES 

§  77.    Definition  of  Profits 

The  word  "profit"  is  variously  defined  according  to  its 
use  in  general  business  or  in  economics;  but  the  particular 
definitions  of  this  term  in  connection  with  real  estate  ac- 
counting are : 

1.  Excess  of  selling  price  over  original  cost. 

2.  Advantage  (gain)  resulting  from  the  employment 

of  capital,  the  corresponding  gain   from  labor 
being  known  as  wages. 

§  78.    Sources  of  Profits 

It  has  already  been  shown  that  real  estate  may  perform 
a  number  of  distinct  functions,  and  it  follows  that  profits 
on  real  estate  may  arise  in  a  number  of  different  ways. 
Among  the  principal  sources  are  the  following,  which  cor- 
respond to  the  functions  already  discussed: 

1.  Profits  from  sales 

Gains  resulting  from  bargain  and  sale. 
Interest  on  deferred  payments. 

2.  Profits  from  rents 

3.  Miscellaneous  profits 

Gains  arising  from  enhancement  of  values ;  from 
consumption  of  assets,  as  in  mining;  from 
crops,  profits  accruing  indirectly  from  the  use 
of  land  for  such  buildings  as  factories,  fur- 
naces, etc. ;  profits  pertaining  to  a  broker  or 
dealer ;  and  profits  obtained  indirectly  from  the 
use  of  borrowed  money  secured  by  real  estate. 
116 


PROFITS    FROM    REAL   ESTATE   SALES  117 

In  regard  to  each  of  these  the  following  questions  must 
be  answered : 

1.  From  what  source  do  the  profits  come? 

2.  How  can  the  amount  of  profits  be  determined? 

3.  Having  determined  this  amount,  what  disposition 

should  be  made  of  it? 

§  79.    Profits  from  Sales 

These  profits  are  evidently  the  difference  between  the 
cost  price  and  the  selling  price.  There  are,  however,  cer- 
tain questions  to  be  considered  in  determining  just  what 
these  two  prices  are,  for  the  amount  actually  paid  for  a 
piece  of  property  may  not  represent  the  cost  of  that  prop- 
erty, and  the  amount  actually  received  from  a  purchaser 
may  include,  besides  the  purchase  price,  interest,  taxes,  and 
insurance,  and  hence  may  not  be  the  true  selling  price. 

§  80.    Cost  Price 

The  original  consideration  for  property  may  have  been 
entirely  cash ;  or  cash  in  part,  with  mortgages  in  some  form. 
Beyond  this  there  are  taxes,  insurance,  interest,  and  im- 
provements to  be  considered,  and,  after  the  proper  entries 
have  been  made,  the  amount  charged  against  the  property 
will  represent  its  actual  cost  at  the  time  of  the  sale. 

§  81.    Selling  Price 

As  already  suggested,  the  selling  price  also  may  involve 
considerations  other  than  the  actual  purchase  price.  It  fre- 
quently includes  taxes  paid  or  to  be  paid,  and  insurance 
paid  in  advance.  In  such  cases  the  amounts  included  in 
these  accounts  should  be  treated  in  the  same  manner  as  simi- 
lar items  under  cost  price.  If  taxes  have  been  included  in 
the  cost  they  should  be  included  also  in  the  selling  price; 
otherwise,  they  should  be  credited  to  Taxes  account. 


REAL   ESTATE  ACCOUNTS 

§  82.    Earned  Profit 

If  the  sale  is  for  cash,  the  difference  between  the  cost 
and  the  selling  price,  as  these  terms  have  been  qualified 
above,  will  show  at  once  the  profit  which  is  earned  and 
realized.  The  entries  required  are  simply  the  posting  of 
the  amount  received,  from  the  cash  book  to  the  credit  side 
of  Real  Estate  account.  If  the  transaction  has  yielded  a 
profit,  a  credit  balance  will  result  to  this  account,  which  is 
best  disposed  of  immediately. 

The  balance,  or  profit,  may,  theoretically,  be  carried 
direct  to  Profit  and  Loss  but  it  is  preferable  to  carry  all 
such  items  into  a  special  account,  "Gain  on  Sales"  or 
"Profits,"  and  at  the  close  of  the  fiscal  period  to  carry  the 
balance  of  this  account  to  Profit  and  Loss.  (See  §§  235, 
236.) 

The  journal  entry  required  to  transfer  the  credit  bal- 
ance of  the  Real  Estate  account  to  Profits  would  be  -as 
follows : 

Real  Estate $ 

To  Profits $ 

For    profits    earned    on    sale    of    property 
No 

In  this  instance  and  in  those  which  follow,  the  gain 
from  a  sale,  when  carried  to  Profits  account,  may  be  car- 
ried to  Profit  and  Loss  at  the  end  of  the  fiscal  period,  while 
the  same  profit  carried  to  Gain  on  Sales  should  be  treated 
in  the  manner  described  in  Chapter  XX. 

§  83.     Mortgage  Assumed  by  Purchaser 

It  very  frequently  happens  that  a  transaction  involves 
more  than  the  exchange  of  cash  for  real  property.  There 
may  be  a  mortgage  or  some  other  lien  which  the  purchaser 
assumes;  or,  more  often,  the  purchaser  may  give  a  mort- 
gage as  a  part  of  the  price  (§§  52,  53). 


PROFITS    FROM   REAL   ESTATE   SALES  119 

In  the  first  instance  the  journal  entry  should  show  that 
the  seller  is  relieved  of  any  obligation  which  is  assumed  by 
the  purchaser,  and  in  many  cases  this  entry  should  include 
some  mention  of  interest  on  the  mortgage.  It  may  be  over- 
due, or  it  may  be  the  sum  which  has  accrued  since  the  last 
interest  date,  as  in  the  case  of  property  sold  on  the  ist  of 
August  subject  to  a  mortgage  payable  on  which  interest 
had  been  paid  up  to  the  ist  of  June. 

In  case  a  mortgage  were  assumed  by  the  purchaser,  the 
journal  entry  on  the  books  of  the  seller  would  take  the 
following  form: 

Mortgages  Payable $ 

To  Real  Estate $ 

For   mortgage    No ,    assumed    by 

on  the 

purchase  of  property  No 

In  the  case  of  overdue  interest  assumed  by  the  pur- 
chaser, the  following  journal  entry  would  be  made  by  the 
seller: 

Mortgages  Payable $ 

Overdue  Mortgage  Interest  Payable 

To  Real  Estate $ 


If  accrued   interest  not  yet   payable  be   included,   the 
entry  would  be : 


Mortgages  Payable 

Mortgage  Interest  Payable. 
To  Real  Estate.. 


§  84.    Large  Cash  Payment — Balance  Secured  by  Mortgage 

In  those  cases  where  a  part  of  the  purchase  price  re- 
mains unpaid  and  is  secured  by  a  mortgage,  the  situation 
becomes  rather  more  complicated,  especially  as  to  the  meth- 


I2o  REAL   ESTATE  ACCOUNTS 

ocls  of  entering  the  profits.  No  one  rule  can  be  made  to 
apply  to  all  such  cases,  and  each  transaction  of  the  kind 
should  be  carefully  examined  by  the  accountant. 

Of  such  cases  the  simplest  is  where  the  purchaser  makes 
a  substantial  cash  payment  and  gives  a  mortgage  for  the 
balance.  The  ratio  between  the  cash  payment  and  the  mort- 
gage then  determines  the  proper  course  to  be  followed.  If, 
for  example,  half  the  purchase  price  is  paid  in  cash,  the 
mortgage  is  secured  by  property  worth  twice  the  amount  of 
the  mortgage,  and  such  mortgages  are  usually  regarded  as 
first-class  securities.  It  would  therefore  be  safe  to  place 
the  mortgage  among  the  assets  at  its  face  value.  In  other 
words,  although  the  entire  consideration  has  not  been  paid, 
we  can  regard  the  sale  as  completed  and  the  profit  as  fully 
earned.  The  mortgage  receivable  can  be  treated  as  a  bona 
fide  asset  for  its  face  value. 

§  85.    Small  Cash  Payment — Balance  Secured  by  Mortgage 

It  frequently  happens,  however,  that  only  a  small  cash 
payment  is  made,  the  greater  part  of  the  purchase  money 
being  secured  by  mortgage.  In  such  a  case  the  safest 
method  is  not  to  consider  the  transaction  as  entirely  closed, 
nor  the  profits  as  actually  earned.  For  example,  if  only 
one-tenth  of  the  purchase  money  has  been  paid,  and  nine- 
tenths  is  secured  by  mortgage,  that  mortgage  could  not, 
as  a  rule,  be  considered  good  marketable  security,  as  the 
amount  of  the  debt  is  too  near  the  value  of  the  security 
and  the  mortgage  has  but  a  small  "margin."  Should  the 
mortgagor  fail  to  pay  the  debt  before  it  has  been  substantial- 
ly reduced,  and  should  it  be  necessary  to  resort  to  legal  pro- 
ceedings in  order  to  recover  the  title,  the  expense  of  such 
proceedings  would,  in  many  cases,  swell  the  amount  of  the 
mortgage  to  a  sum  equal  to,  or  greater  than,  the  original 
debt. 


PROFITS    FROM    REAL   ESTATE   SALES  121 

§  86.    Gain  on  Sales  Account 

In  cases  where  mortgages  are  taken  in  part  payment, 
the  apparent  gain  should  be  carried  to  the  Gain  on  Sales 
account  (§§  79-82).  The  handling  of  this  account  is  treated 
more  fully  in  Chapter  XX. 

The  entries  made  on  the  cash  book  should  credit  Real 
Estate  with  the  amount  of  cash  received,  and  the  journal 
entry  is  as  follows : 

Mortgages  Receivable $ 

To  Real  Estate $ 

"    Gain  on  Sales. . 


§  87.    Sales  on  Contract 

It  is  a  practice  common  probably  throughout  the  United 
States,  for  owners  of  real  estate,  especially  corporations 
whose  business  it  is  to  buy,  develop,  and  dispose  of  real 
estate,  to  sell  their  property  under  some  form  of  agreement, 
which  for  the  sake  of  brevity  we  will  call  a  "contract."  The 
subject  of  contracts  is  more  fully  discussed  in  Chapter  XVII. 
In  a  great  majority  of  cases,  the  first  payment  is  small,  and 
the  contract  may  carry  with  it  no  obligation  on  the  part  of 
the  purchaser  to  complete  the  purchase.  In  such  an  instance, 
the  general  procedure  is  the  same  as  in  the  case  of  mort- 
gages on  which  a  small  payment  has  been  made.  The  jour- 
nal entry  would  be  in  the  following  form: 


Contracts   

To  Real  Estate . . , 
"    Gain  on  Sales. 


§  88.    Exchange  of  Properties 

Another  method  very  frequently  used  in  disposing  of 
real  estate  is  in  the  nature  of  an  exchange,  the  owner  selling 
his  property  and  taking  in  payment  therefor  other  prop- 


I22  REAL    ESTATE   ACCOUNTS 

erty,  with  perhaps  some  cash  payment  in  addition.  The  en- 
tering of  such  a  transaction  on  the  books  is  a  simple  matter, 
and  takes  the  following  form  in  the  journal : 

Real  Estate $ 

To  Real  Estate $ 

For  exchange   of  property   No for 

property  No 

The  most  important  point  for  investigation  in  such 
transactions  is  the  value  at  which  the  new  property  is  taken, 
for  it  sometimes  happens  that  matters  other  than  the  actual 
cash  value  of  the  property  are  taken  into  consideration 
when  the  exchange  is  made;  and  the  amount  allowed  for 
the  property  received  may  not  indicate  its  market  value, 
since  it  is  not  unusual  to  place  a  higher  valuation  on  prop- 
erty when  it  is  paid  for  "in  trade"  than  would  be  asked  if 
the  consideration  were  cash.  For  instance,  the  owner  of 
a  piece  of  property  may  be  willing  to  give  it  in  exchange, 
at  less  than  its  actual  value,  for  other  property  situated  in 
a  neighborhood  in  which  he  is  interested,  or  which  is  suit- 
able for  some  special  purpose  which  he  desires  to  carry  out. 
It  is  evident  that  in  such  a  case  the  property  so  acquired 
may  be  brought  on  the  books  at  a  figure  in  excess  of  its 
market  value. 

§  89.    Appraisal  of  Property 

The  appraisal  of  any  real  estate  is,  of  course,  merely  an 
expression  of  opinion,  and  the  only  true  measure  of  its 
value  at  a  given  time  is  an  actual  sale,  or  a  bona  fide  offer 
of  cash  or  its  equivalent.  At  the  same  time,  before  pass- 
ing such  an  entry  as  that  described,  an  accountant  should 
satisfy  himself  that  the  property  taken  on  the  books,  to 
the  best  of  the  information  obtainable  by  him,  is  taken  at 
a  fair  valuation.  This  valuation,  of  course,  should  never 


PROFITS  FROM  REAL  ESTATE  SALES     123 

exceed  the  price  actually  paid  for  the  property.  In  other 
words,  if  an  owner  takes  property  in  exchange  and  allows 
$1,000  for  it,  it  should  be  entered  at  this  figure  even  if  he 
considers  it  worth  $1,500.  The  excess  of  $500  should  not 
be  put  on  the  books  until  an  actual  sale  of  the  property  has 
proved  that  such  value  exists. 

§  90.    Development  Properties 

The  treatment  of  profits  accruing  from  the  sale  of  sub- 
urban tracts  or  development  properties  (that  is,  land  bought 
in  considerable  quantities,  subdivided  by  the  owner  and  sold 
off  in  comparatively  small  lots)  is  treated  in  detail  in  Chap- 
ter XXIII. 

§  91.    Hidden  Profits 

In  some  cases  the  profits  from  real  estate  may  be  said 
to  be  hidden  — •  a  condition  most  clearly  explained  by  an 
example  from  actual  practice. 

Four  partners  together  bought  a  tract  of  3,000  acres  of 
land,  for  which  they  paid  $15,000.  This  was  held  for  a 
period,  during  which  the  value  of  the  land  materially  in- 
creased. The  tract  was  then  platted,  and,  after  deducting 
roads  and  waste  land,  500  farms  of  5  acres  each  were  laid 
off.  The  immediate  minimum  selling  price  for  these  was 
estimated  at  $100  each,  or  $50,000  for  all.  The  four  part- 
ners formed  a  corporation,  transferred  the  property  to  it, 
and  issued  capital  stock  in  payment  for  the  property  to  the 
amount  of  $50,000,  and  this  stock  was  divided  equally 
among  them.  To  provide  for  current  expenses,  each  in- 
corporator  paid  in  a  certain  sum,  which  was  treated  as  a 
current  loan  and  placed  to  his  credit.  As  farms  were  sold, 
the  proceeds  were  used  in  making  roads  and  other  improve- 
ments, and  after  a  few  months  it  was  found  possible  to  sell 
the  farms  at  prices  ranging  from  $600  to  $750  each. 


124 


REAL   ESTATE  ACCOUNTS 


It  will  readily  be  seen  that  the  conditions  in  this  case 
differ  radically  from  those  previously  considered,  and  that 
the  results  of  this  difference  are  far-reaching.  So  far  as 
the  company  is  concerned,  the  cost  of  the  land  equals  the 
amount  of  capital  stock  issued.  The  partners,  however, 
sold  the  land  to  the  corporation  and  received  $50,000  worth 
of  stock  in  exchange,  thereby  realizing  a  profit  of  $35,000 
on  the  transaction.  In  preparing  their  returns  for  the  fed- 
eral income  tax,  it  would  be  necessary  for  each  partner  to 
report  his  individual  share  of  this  gain. 

§  92.    Anticipated  Profits 

The  foregoing  illustration  is  not  given  as  an  example 
to  be  followed,  but  merely  to  illustrate  the  complications 
which  may  arise.  In  fact,  the  wisdom  of  anticipating  profits 
in  this  way  is  doubtful,  and  such  a  method  should  not  be 
generally  followed.  Even  in  the  instance  given,  although 
in  the  form  of  a  corporation,  it  was  for  most  practical  pur- 
poses a  partnership,  and  the  same  results  could  have  been 
obtained  if  the  company  had  been  capitalized  for  the  cost 
of  the  land  and  the  improvements  made  or  contemplated. 
But  the  main  object  of  the  company,  besides  the  avoidance 
of  individual  liability  in  warranting  titles  and  in  various 
other  ways,  was  to  obscure  or  hide  from  the  public  the 
original  cost  of  the  land. 


CHAPTER    XIV 

PROFITS    FROM    RENTS 

§93.    Rent 

For  the  accountant,  rent  means  a  compensation  payable 
at  some  stated  time  or  times  for  the  possession  and  use  of 
(but  not  the  title  to)  property  for  a  definite  period. 

This  definition  must  sometimes  be  developed  further, 
for  the  term  is  not  infrequently  used  in  a  somewhat  lax 
manner  to  mean  more  than  payment  for  the  use  of  property. 
In  some  forms  of  contract  for  sale  on  instalments,  the  agree- 
ment is  called  a  "lease"  and  the  periodic  payments  are  re- 
ferred to  as  "rent,"  although,  if  the  transaction  is  com- 
pleted, they  really  form  a  part  of  the  purchase  price.  These 
questions  are  discussed  under  the  head  of  "Contracts"  in 
Chapter  XVII. 

Again,  the  word  "rent"  is  sometimes  used  to  indicate 
the  consideration  given  for  mining  rights,  which  is  in  the 
nature  of  a  royalty,  for  it  pays  not  for  the  use  or  hire  of 
the  material  mined,  but  for  the  material  itself,  which  be- 
comes the  property  of  the  lessee  on  such  payment  being 
made  or  agreed  upon.  A  somewhat  similar  use  of  the  word 
is  occasionally  found  in  connection  with  hire  purchase  agree- 
ments. 

The  particular  kind  of  rent  considered  in  the  present 
volume  is  covered  by  the  first  definition  given  above,  and 
by  the  every-day,  non-technical  use  of  the  word,  meaning 
the  amount  a  tenant  pays  to  his  landlord  for  the  right  to 
use  and  occupy  land,  including  in  most  cases  a  dwelling  or 
factory,  or  other  improvements  on  the  land.  Such  rent 

125 


I26  REAL   ESTATE  ACCOUNTS 

constitutes  the  return  which  an  owner  receives  for  the  use 
or  hire  of  his  property,  whether  it  be  land,  building,  ma- 
chinery, or  any  other  property,  real  or  personal. 

§  94.    Leases 

The  amount,  duration  of  occupancy,  time  of  payment, 
and  other  particulars,  are  frequently  set  forth  in  a  lease. 
In  a  very  large  number  of  cases,  however,  no  such  paper 
is  drawn  and  the  agreement  is  merely  a  verbal  one,  as  in 
the  case  of  small  dwellings  and  tenements,  where  the  rent 
is  paid  at  short  intervals,  as  a  week  or  a  month,  and  where 
the  arrangement  may  be  terminated  on  short  notice  by 
either  the  landlord  or  the  tenant. 

In  a  general  way  it  may  be  said  that  the  purpose  of  a 
lease,  beyond  stating  the  terms  to  be  observed  by  the  par- 
ties, is  the  protection  of  both  the  landlord  and  the  tenant. 
The  landlord  is  protected  because  the  tenant  agrees  to  make 
stipulated  payments  in  a  definite  manner,  and  such  agree- 
ments can  usually  be  enforced  through  the  courts,  although 
the  method  of  procedure  and  the  practical  value  of  the 
remedy  vary  with  the  locality.  The  tenant  is  protected  be- 
cause he  is  assured — if  he  fulfils  his  part  of  the  contract — 
of  the  use  of  definite  property  for  a  definite  period  at  a 
definite  price. 

The  law  and  the  practice  regarding  leases  vary  in  each 
country  and  in  each  of  our  states.  It  would  be  useless  to 
attempt  to  follow  these  variations  further  than  to  remivid 
the  accountant  that  it  is  a  part  of  his  duty  to  familiarize  him- 
self with  all  local  requirements  as  to  leases. 

While  it  is  not  the  duty  of  an  accountant  to  act  as  ap- 
praiser, it  is  his  duty  to  see  that  leases  are  drawn  and  exe- 
cuted in  conformity  with  statutory  requirements.  This  is 
especially  true  in  the  United  States,  where  owners  of  real 
estate,  when  leasing  their  property,  frequently  rely  upon 


PROFITS    FROM    RENTS  127 

printed  forms,  of  more  or  less  excellence,  bought  by  the 
dozen  from  the  nearest  stationer,  dispensing  with  the  ser- 
vices of  a  legal  adviser  until  they  find  themselves  at  the 
court-house  door. 

§  95.    Gross  Rent  and  Net  Rent 

In  real  estate  records,  the  expressions  "gross  rent"  and 
"net  rent"  frequently  occur,  corresponding  in  general  to 
the  "gross  profits"  and  "net  profits"  of  a  mercantile  enter- 
prise, but  too  often  used  in  a  vague  and  indefinite  sense. 

The  term  "gross  rent"  properly  designates  the  total 
amount  received  by  the  owner  from  the  tenant  or  lessee  for 
the  use  of  certain  property.  In  order  to  obtain  this  gross 
rent,  however,  the  owner  is  frequently  obliged  to  make  cer- 
tain outlays,  and  the  difference  between  the  gross  rent  and 
these  necessary  outlays  constitutes  the  "net  rent." 

The  exact  nature  of  these  outlays  cannot  be  given,  for 
they  vary  according  to  local  laws,  the  nature  of  the  property, 
and  the  terms  of  the  agreement.  The  necessary  outlays  in 
the  United  States  usually  include  taxes,  insurance,  and 
repairs. 

In  apartment  or  office  buildings  the  following  expenses 
must  usually  be  added :  light,  water,  heat,  power,  and  wages. 

The  essential  point  is  to  include  all  the  necessary  ex- 
penditures, in  order  to  obtain  the  net  rent. 

§  96.    Net  Rent  and  Net  Returns 

Strictly  speaking,  the  other  closely  related  charges,  such 
as  interest  and  depreciation,  do  not  affect  net  rent,  although 
they  must  be  included  when  considering  net  returns.  The 
fact  that  an  owner  is  obliged  to  pay  interest  on  money  which 
he  has  borrowed  on  a  mortgage  secured  by  a  piece  of  prop- 
erty, in  no  way  affects  the  net  rents;  for  the  existence  of 
the  mortgage  does  not  of  necessity  affect  the  value  of  the 


I2g  REAL   ESTATE   ACCOUNTS 

property,  though  it  may  materially  affect  the  returns  ob- 
tained by  a  purchaser  on  the  amount  which  he  has  to  pay 
for  the  property. 

As  a  simple  example,  take  an  office  building  worth 
$200,000,  yielding  gross  rents  of  $16,000  a  year,  and  form- 
ing the  security  for  a  mortgage  of  $100,000,  bearing  inter- 
est at  the  rate  of  6%  per  annum.  The  gross  earnings  of 
$16,000  are  entirely  independent  of  the  mortgage  and  con- 
stitute 8%  of  the  value.  In  order  to  buy  the  property, 
however,  a  purchaser  need  invest  in  cash  only  $100,000 
and  assume  the  existing  mortgage.  The  result  is  that  he 

receives  gross  rentals  of $16,000 

From  which  he  pays  interest  at  6%  on  $100,000. .       6,000 


Leaving  a  gross  return  of $10,000 

which  is  a  gross  return  of  10%  on  the  investment,  although 
the  gross  rent  is  only  8%  on  the  value. 

In  other  instances,  e.g.,  where  the  land  is  occupied  by 
buildings  not  commensurate  with  its  value,  the  rate  of  in- 
terest may  exceed  the  percentage  of  gross  rentals,  and  the 
result  obtained  will  be  opposite  to  that  shown  in  the  above 
example.  The  principle,  however,  remains  unchanged. 

It  is  impossible  to  do  more  than  indicate  the  factors 
which  must  be  considered  in  determining  the  net  rents,  as 
in  practice  they  depend  largely  upon  local  values  and  con- 
ditions. 

§  97.    When  Should  Rents  Be  Entered? 

No  mention  of  provision  for  entering  rents  on  the  books 
of  account  until  those  rents  are  collected  has  yet  been  made, 
and  no  one  general  rule  governing  the  proper  procedure  can 
be  stated.  The  course  to  be  followed  is  to  be  determined 
by  (i)  the  laws  governing  each  case,  and  (2)  the  class  of 
tenant. 


PROFITS    FROM    RENTS  1 29 

In  England,  for  example,  it  is  the  general  practice  to 
credit  the  property  and  debit  the  tenant  with  rent  as  it 
falls  due,  and  to  credit  the  tenant  when  payment  is  made. 
In  that  country  the  law  provides  the  landlord  with  such 
means  of  enforcing  his  claims  that  he  is  usually  reasonably 
sure  of  making  his  collections. 

On  the  other  hand,  in  our  own  Southern  States,  the  laws 
concerning  delinquent  tenants  are  less  severe,  and  home- 
stead exemptions  are  usual.  Further,  a  large  amount  of 
rental  property  is  occupied  by  colored  people  of  somewhat 
migratory  habits,  and  the  flitting  tenant  is  as  common  as 
the  flitting  cardinal-bird,  and  quite  as  elusive.  In  such 
cases  it  is  misleading  and  a  waste  of  labor  to  follow  the 
above  procedure,  and  frequently  the  cash  actually  collected 
is  the  only  asset.  Rent  remaining  unpaid  is  not  only  un- 
collected,  but  uncollectible,  and  its  inclusion  in  a  profit  and 
loss  account  may  lead  to  a  similar  inclusion  of  other  equally 
worthless  and  fictitious  assets. 

These  conditions  have  naturally  brought  about  the  gen- 
eral plan  of  making  rent  payable  in  advance,  usually  by 
monthly  instalments.  Such  being  the  case,  circumstances 
must  govern  procedure.  It  should  not  be  forgotten,  how- 
ever, that  even  if  rent  is  not  charged  against  the  tenant  here 
as  it  is  in  England,  there  should  always  be  a  rent  ledger 
so  kept  as  to  enable  a  concern  to  determine  quickly  all  ar- 
rears which  may  be  due.  When  preparing  financial  state- 
ments, the  amount  of  such  arrears  may  properly  be  shown 
in  a  footnote. 

§  98.     Rents  from  Mines  and  Similar  Sources 

The  treatment  of  rentals  from  mines  pertains  to  the  ac- 
counts of  mining  companies  rather  than  to  those  of  a  real 
estate  concern,  and  need  not  be  considered  in  great  detail 
at  this  time.  As  has  already  been  stated,  the  periodic  pay- 


REAL   ESTATE  ACCOUNTS 

ments  are  not,  strictly  speaking,  rents,  but  are  a  considera- 
tion for  something  pertaining  to  the  natural  land,  which 
may  be  the  coal  or  other  mineral  deposits  under  the  sur- 
face, or  the  natural  product  of  the  soil  above  the  surface, 
as  in  the  case  of  timber  lands;  or  the  removing  of  certain 
parts  of  that  product,  as  in  the  case  of  turpentine  and  rosin, 
tapping  for  maple  syrup,  cutting  camphor  trees,  etc. 

The  value  of  all  such  lands  is  composed  of  (i)  the 
value  of  the  deposit  or  growth;  (2)  the  residual  value  of 
the  land  after  such  deposit  or  growth  is  removed. 

Inasmuch  as  the  rents  or  royalties  paid  in  these  cases 
are  the  consideration  given  for  the  outright  purchase  and 
consumption  of  principal,  they  should  not  be  credited,  in 
the  first  instance,  to  Profits,  but  to  Real  Estate.  When  they 
become  equal  to  the  cost  of  the  property,  all  further  rents 
may  properly  be  credited  to  Profits. 

§  99.    Treatment  of  Mining  Rents 

Beyond  the  suggestions  already  given,  it  is  difficult  to 
generalize  in  the  matter  of  rents  from  mines  and  similar 
returns,  for  each  instance  must  be  worked  out  for  itself, 
the  residual  value  being  so  variable.  For  example,  deep 
mining  does  not  affect  the  value  of  the  land  for  agricultural 
purposes;  while  quarrying,  clay  working,  and  other  varie- 
ties of  open  mines  leave  the  land  in  such  form  as  to  render 
it  useless  for  any  subsequent  purpose. 

For  an  example  of  the  consumption  of  growth  on  the 
land,  consider  the  yellow  pine  forests  of  the  Southern  and 
Southwestern  States.  Here  there  are  three  distinct  ele- 
ments of  value  appealing  to  three  distinct  classes  of  in- 
vestors, viz.: 

i.  The  turpentine  rights,  which  cover  only  the  "box- 
ing" of  the  timber  and  are  useful  only  to  naval 
stores  operators. 


PROFITS   FROM   RENTS  131 

2.  The  trees  themselves,   which,   after  having  been 

"boxed,"  retain  their  value  for  logging1  purposes. 

3.  The  naked  land,  which  in  many  cases  is  more  valu- 

able for  agricultural  purposes  after  the  turpen- 
tine and  logs  are  removed  than  it  was  before. 

In  such  an  instance,  the  total  cost  of  the  land  may  be 
apportioned  to  these  three  divisions  without  difficulty,  for 
such  land  is  almost  invariably  surveyed  and  examined  by 
experts  before  purchase.  If  the  rent  obtained  for  turpen- 
tine rights  exceeds  the  portion  of  the  cost  assigned  to  tur- 
pentine, such  excess  is  profit;  if  it  falls  short,  the  deficit 
may  be  regarded  as  a  loss,  or,  under  some  circumstances, 
may  be  added  to  the  cost  of  the  land  and  timber.  The  same 
principle  is  followed  with  the  logging  payments,  and  the 
naked  land  is  left  with  its  proper  proportion  of  the  cost. 


CHAPTER    XV 

PROFITS    FROM    ENHANCEMENT    OF    VALUE 
AND    FROM    MISCELLANEOUS     SOURCES 

PROFITS  FROM  ENHANCEMENT  OF  VALUE 

§  100.     Increased  Value  of  Mineral  Lands 

In  the  case  of  mining  rights,  there  frequently  arises  a 
need  for  reappraisals  on  account  of  fresh  deposits  being 
found,  or  on  account  of  improved  facilities  becoming  avail- 
able, which  render  possible  or  profitable  the  working  of 
deposits  not  included  in  the  original  valuations.  Such  in- 
creases should,  of  course,  be  shown  in  the  accounts,  but 
the  matter  of  revaluations  must  be  approached  in  a  conserva- 
tive and  fair-minded  manner.  These  increases  are  fre- 
quently somewhat  problematical,  and  any  doubtful  portion 
of  the  increase  should  be  shown,  not  in  the  general  Property 
account,  but  in  a  special  reserve  account  opened  for  the 
purpose  and  finally  disposed  of  either  as  a  gain  or  as  a  loss, 
as  the  circumstances  may  determine. 

§101.    Enhanced  Real  Estate  Values 

By  this  is  meant  an  increase  in  the  market  price  of  real 
estate  not  sold  but  still  owned  by  a  concern.  When  con- 
sidering this  source  of  profit,  the  manager  should  clearly 
recognize  the  distinction  between  property  owned  and 
offered  for  sale  by  a  real  estate  concern,  and  the  real  estate 
owned  by  a  mercantile  or  manufacturing  concern,  consisting 
of  warehouses  or  factories  necessary  for  the  conduct  of 
business,  but  not,  in  the  ordinary  sense  of  the  term,  for  sale. 

132 


PROFITS    FROM    ENHANCEMENT   OF   VALUE       133 

It  must  not  be  forgotten  that  an  enhanced  valuation 
merely  means  that  those  making  that  valuation  are  of  the 
opinion,  or  have  the  faith,  that  such  values  could  be  realized. 
There  is  yet  to  be  found  a  better  definition  of  faith  than  that 
which  has  been  accepted  for  nearly  two  thousand  years — 
"the  substance  of  things  hoped  for,  the  evidence  of  things 
not  seen."  This  indicates  with  singular  accuracy  the  proper 
course  to  follow ;  the  increase  in  values  is  something  hoped 
for  and  believed  in,  but  not  realized.  At  the  same  time,  it 
may  be  fair  to  show  some  evidence  of  this  hope  by  a  proper 
entry  on  the  balance  sheet. 

The  proper  place  for  anticipated  profits  to  appear  is  in  a 
prospectus,  a  document  whose  very  name  indicates  that  it 
describes  the  good  things  which  are  expected  to  come.  On 
the  other  hand,  a  balance  sheet  states  conditions  existing  at 
a  given  moment  which  has  already  passed.  While  it  may 
be  a  matter  of  regret  that  the  statements  of  the  balance 
sheet  do  not  always  fulfil  the  predictions  of  the  prospectus, 
it  is  of  importance  to  the  stockholders  that  any  such  dis- 
crepancies in  values  be  exhibited  clearly,  and  if  it  is  neces- 
sary to  anticipate  profits  in  order  to  hide  such  discrepancies, 
the  investment  is  liable  to  prove  a  failure. 

§  102.    Fluctuations  in  Real  Estate  Values 

When  considering  the  wisdom  of  placing  on  the  books 
any  values  of  real  estate  other  than  the  cost  price,  it  must 
be  remembered  that,  while  real  estate  is  among  the  most 
stable  of  assets  inasmuch  as  it  seldom  entirely  disappears, 
it  is  peculiarly  sensitive  to  fluctuations  in  its  selling  value. 
Its  very  immobility  is  one  cause  of  this,  for  neighboring 
improvements  or  changes  which  are  beyond  the  control  of 
its  owner  may  cause  its  value  to  vary  considerably. 

Again,  real  estate  is  not  a  necessity  of  life  in  the  same 
sense  as  food  products  or  clothing,  and  the  real  estate  mar- 


134 


REAL    ESTATE   ACCOUNTS 


ket  is  one  of  the  first  to  suffer  in  times  of  depression  or 
panic,  fluctuating  to  a  degree  equalled  only  by  those  articles 
which  are  obvious  luxuries.  Such  times  of  panic  are  the 
very  occasions  when  it  may  be  necessary  to  realize  on  assets, 
and  this  realization  will  undoubtedly  puncture  any  inflation 
which  may  exist. 

§  103.    Bank  Practice 

An  example,  or  rather  a  series  of  examples,  which  may 
be  instructive  for  too  optimistic  a  management,  may  be 
found  in  the  treatment  of  real  estate  by  banks  and  trust 
companies  throughout  the  country,  which  for  the  most  part 
do  not  show  their  real  estate  assets  at  any  figure  above  cost, 
and,  owing  to  liberal  allowances  for  depreciation,  frequently 
show  them  below  cost. 

The  policy  proper  to  a  bank  may  differ,  of  course,  from 
that  of  the  ordinary  business  firm,  but  it  is  only  natural  for 
a  banker  from  whom  a  concern  borrows,  to  apply  with 
more  or  less  stringency  the  rule  that  "what  is  sauce  for  the 
goose,  is  sauce  for  the  gander." 

§  104.    Accounting  Treatment 

The  question  of  entering  on  the  books  of  account  actual 
or  supposed  increases  in  value  of  real  estate  before  they  are 
realized,  is  one  which  accountants  are  frequently  forced  to 
consider.  It  is  obvious  that  no  such  increase  of  assets  should 
be  allowed  on  mere  hearsay  evidence,  or  on  the  personal 
opinion  of  an  individual. 

In  those  cases  where  the  claim  for  an  enhanced  value  is 
supported  by  the  report  of  properly  qualified  appraisers,  or 
by  a  bona  fide  offer  of  purchase,  it  is  sometimes  considered 
advisable  to  show  this  increase  on  the  balance  sheet,  where 
it  may  be  the  proper  foundation  for  an  increase  in  a  line  of 
credit  or  in  the  Surplus  account,  or  possibly  it  may  warrant 


PROFITS   FROM   ENHANCEMENT  OF  VALUE       135 

the  issuance  of  a  stock  dividend.  It  can  seldom,  if  ever,  be 
properly  included  in  Profit  and  Loss  account,  and  it  cannot 
afford  a  proper  basis  for  the  declaration  of  a  cash  dividend ; 
for,  in  the  case  of  a  mercantile  or  manufacturing  concern, 
land  is  usually  held  incidentally,  as  it  were,  and  its  increase 
in  value  is  not  profit  arising  out  of  the  operation  of  the 
business.  Such  a  profit  would  be  the  proper  basis  for 
dividends,  but  an  increase  in  real  estate  values  would 
not  ordinarily  be  so — unless  these  profits  were  actually 
realized. 

As  an  argument  for  making  entries  showing  enhanced 
values,  it  is  sometimes  stated  that  property  carried  on  the 
books  at  a  certain  figure  is  covered  by  a  mortgage  securing 
an  amount  greater  than  its  original  cost.  Even  if  such  were 
the  case,  it  merely  shows  that  another  person  had  faith  in 
the  concern  and  loaned  money  to  it,  accepting  the  property 
as  security.  The  concern  did  not  realize  on  the  value  and 
its  treasury  did  not  receive  it. 

§  105.     Rights  of  Stockholders 

It  may  be  suggested,  in  connection  with  increased  real 
estate  values,  that  there  is  another  point  of  view  to  be  con- 
sidered— that  of  the  stockholders,  for  whom  the  officers  of 
the  company  are,  in  fact,  trustees. 

Let  us  assume  that  a  manufacturing  concern  has  for  a 
long  period  owned  its  land  and  buildings,  and  has  increased 
its  business  to  such  a  point  that  no  further  increase  can  be 
made  unless  additional  capital,  either  fixed  or  floating,  is 
provided.  During  this  period  of  success,  the  land  has  in- 
creased in  market  price  to  such  an  extent  that  it  would  now 
form  ample  security  for  a  loan  of  sufficient  size  to  obviate 
the  necessity  for  a  further  issue  of  capital  stock,  although  its 
cost  price  as  shown  on  the  ledger  does  not  indicate  this. 

It  will  generally  be  conceded  that  in  such  an  instance 


136 


REAL    ESTATE   ACCOUNTS 


the  directors  might  be  derelict  in  their  duties  if  they  failed 
to  avail  themselves  of  this  appreciated  value;  and  having 
availed  themselves  of  it,  the  appreciation  should  appear  in 
the  accounts.  If  they  failed  to  show  it,  there  would  exist 
something  very  nearly  akin  to  that  bone  of  contention,  a 
"secret  reserve" — a  matter  not  for  discussion  here. 

§  106.     Effect  of  Enhanced  Real  Estate  Values  on  Rent 
Charges 

There  is  another  aspect  of  the  above  conditions  which 
is  too  frequently  overlooked,  and  which  can  be  made  clear 
by  an  example.  A  mercantile  concern  paid  $60,000  for  the 
building  in  which  it  transacted  its  business.  Owing  to  im- 
provements in  surrounding  properties,  the  actual  value  of 
this  building  increased  in  the  course  of  three  years  to  $150,- 
ooo,  evidenced  by  an  offer  for  the  property  at  that  figure. 
It  had  been  the  custom  of  this  concern  to  make  a  rent  charge 
based  on  8%  of  the  cost  of  the  property,  or  $4,800  a  year. 
As  soon  as  it  is  possible  to  obtain  a  higher  price  for  the 
property,  this  basis  of  calculation  becomes  erroneous,  for 
when  the  value  of  $150,000  was  reached,  the  concern  was 
paying  (on  the  same  basis)  a  rental  of  $12,000  a  year — 
which  might  be  far  in  excess  of  what  the  business  war- 
ranted. 

It  is  evident  that  if  property  can  be  sold  for  $150,000, 
that  sum  is  tied  up  in  it,  and  that  amount  fixes  the  proper 
rent  charge.  The  wisdom  of  paying  such  a  rent  depends, 
on  the  one  hand,  upon  the  earning  capacity  of  the  business, 
and,  on  the  other  hand,  upon  the  contingency  of  such  further 
increase  in  value  as  will  refund  the  excessive  rent.  At  the 
same  time,  as  soon  as  a  concern  relies  upon  increases  of 
real  estate  values  for  its  profits,  it  is  to  some  extent  engaging 
in  real  estate  business  as  well  as  in  that  for  which  it  was 
created. 


PROFITS    FROM    ENHANCEMENT   OF   VALUE       137 

§  107.    Summary 

The  entire  question  as  to  the  treatment  of  profits  from 
enhanced  real  estate  values  not  yet  realized  may  be  sum- 
marized as  follows: 

1.  In  the  case  of  a  real  estate  concern  whose  chief  asset 
is  its  real  estate,  such  appreciation  should  not  be  added  to 
the  cost  price. 

2.  In  the  case  of  a  concern  engaged  in  some  other  kind 
of  business,  it  may,  under  some  circumstances  and  with 
proper  restrictions,  be  permissible  or  even  necessary  to  show 
such  appreciation,  but  it  should  be  stated  so  clearly  that  no 
one  will  be  deceived  as  to  the  nature  of  the  profit. 

3.  In  the  latter  case,  such  profits  should  never  be  shown 
in  the  Profit  and  Loss  account  as  arising  from  the  operation 
of  the  business,  but  should  be  carried  to  a  Reserve  and 
Surplus  account. 

PROFITS  FROM  MISCELLANEOUS  SOURCES 
§  108.    Profits  from  Money  Borrowed  on  Real  Estate 

Profits  from  money  borrowed  on  real  estate  and  re- 
invested do  not  necessarily  affect  the  accounts  of  a  real 
estate  concern  as  such,  for  the  money  so  borrowed  may  be 
invested  in  any  enterprise  or  security.  No  discussion  of 
such  profits,  therefore,  is  necessary  here. 

§  109.    Operation  of  Manufacturing  Properties 

It  is  a  common  occurrence  for  a  real  estate  concern  to 
find  itself  the  owner,  by  sale  or  exchange,  or  more  often  by 
foreclosure  proceedings,  of  certain  properties  whose  values 
can  be  maintained  only  by  operation.  In  a  general  way, 
such  properties  may  be  divided  into  two  classes,  viz.:  (i) 
manufacturing  or  mining,  (2)  agricultural.  The  distinction 
here  made  is  perhaps  an  artificial  one,  for  the  difference  in 


j^g  REAL    ESTATE   ACCOUNTS 

treatment  depends  less  upon  the  nature  of  the  business  than 
upon  the  amount  of  detail  involved. 

In  operating  any  property  of  the  first  class,  be  it  a 
factory,  mill,  coal  mine,  brick-yard,  or  other  enterprise  in- 
volving numerous  expenditures  and  detailed  accounts,  a 
separate  set  of  books  should  be  opened,  such  as  would  be 
required  were  the  business  owned  by  strangers. 

The  accounts  of  the  real  estate  concern  should  show  in 
one  account  the  principal  invested,  and  in  the  other  account 
the  cash  advanced  to  or  received  from  the  business.  At  the 
close  of  each  fiscal  period  the  books  of  the  business  should 
be  closed  in  a  proper  manner,  inventories  taken,  balance 
sheet  and  accompanying  statements  prepared,  and  adjust- 
ments made  to  the  Principal  account  if  there  have  been 
changes  in  value.  The  final  profit  should  be  carried  into  the 
general  Profit  and  Loss  account.  The  point  to  be  emphasized 
is  that  in  all  such  cases  the  general  books  of  the  real  estate 
concern  should  be  kept  free  from  all  details  of  operation. 

§  1 10.    Operation  of  Agricultural  Properties 

Agricultural  properties,  such  as  farms,  orchards,  and 
plantations,  do  not,  as  a  rule,  involve  so  many  details.  Such 
properties  are  usually  placed  under  the  management  of  a 
superintendent  skilled  in  that  particular  branch  of  work. 
The  payments  are  comparatively  few,  consisting  of  monthly 
pay-rolls,  bills  for  fertilizers,  tools,  etc.,  and  the  receipts 
consist  of  annual  returns  from  the  crops.  Under  these  cir- 
cumstances, all  the  business  may  be  carried  on  the  general 
books  of  the  concern,  and,  if  necessary,  a  sub-ledger  con- 
taining the  account  of  each  piece  of  property  so  operated 
may  be  opened. 

As  an  example,  let  us  consider  the  case  of  a  large  con- 
cern which  had  loaned  considerable  sums  secured  by  mort- 
gages on  orchards  and,  owing  to  bad  seasons,  was  obliged 


PROFITS   FROM   MISCELLANEOUS    SOURCES 


139 


to  foreclose  on  a  number  of  them.  It  was  necessary  either 
to  maintain  the  orchards  or  lose  the  chief  value  of  the 
property,  which  lay  in  the  trees  rather  than  in  the  land  and 
improvements. 

This  concern  engaged  a  traveling  superintendent,  who 
installed  a  resident  farmer  in  charge  of  each  orchard,  this 
latter  approving  all  expenditures.  These  were  charged 
monthly,  through  a  special  column  in  the  cash  book,  to 
"Care  of  Orchards,"  and  each  item  was  posted  to  the  account 
of  the  particular  orchard  concerned,  which  was  opened  in 
an  "orchard"  sub-ledger,  the  superintendent's  expenses  being 
prorated  among  all  the  properties  in  his  charge.  All  receipts 
were  treated  in  a  similar  manner. 

The  result  was  that  the  general  ledger  always  showed 
the  totals  of  the  orchards  as  a  whole,  while  the  sub-ledger 
showed  the  result  of  each  orchard.  The  general  ledger 
enabled  an  annual  analysis  to  be  made,  showing  the  total 
amounts  expended  respectively  for  management,  labor,  re- 
pairs, fertilizer,  picking,  and  tools. 

In  such  accounts  care  must  always  be  exercised  to  see 
that  the  items  charged  to  repairs  and  improvements  are 
properly  distributed.  The  distribution  of  these  charges 
must  be  governed  by  the  principles  laid  down  in  Chapter  X. 

§  in.    Operation  of  Orchards — Increase  in  Value 

Owing  to  risks  incident  to  all  agricultural  enterprises, 
the  greatest  conservatism  must  be  observed  in  bringing  on 
the  books  any  enhanced  values  on  account  of  the  growth 
of  trees,  for  the  trees  themselves  may  be  destroyed  at  any 
time  by  pests,  drouth,  cold,  or  by  some  enemy  yet  un- 
discovered. The  safe  course,  therefore,  is  to  write  such 
enhanced  values  on  the  books  when  they  are  realized  by  a 
sale  of  the  property,  observing  the  rule  laid  down  elsewhere 
that  Property  account  shall  represent  actual  cost  of  land 


140 


REAL   ESTATE  ACCOUNTS 


and  improvements.  Clearing  new  land  and  planting. new 
trees  are  examples  of  improvements,  but  new  trees  planted 
in  place  of  those  which  have  died  are  renewals,  not  better- 
ments. 

§  112.    Showing  Profit  on  Annual  Statements 

Instead  of  closing  the  operating  accounts  each  year,  it  is 
sometimes  wiser  to  carry  forward  the  balance  from  year 
to  year,  particularly  in  the  case  of  a  young  orchard  not  yet 
in  bearing.  These  totals  may  appear  separately  in  the  bal- 
ance sheet  in  some  manner  which  shows  so  clearly  the  nature 
of  the  asset  that  no  one  can  be  misled.  While  such  a  course 
increases  the  amount  of  the  asset  on  the  books,  it  represents 
actual  expenditures,  and  is  quite  distinct  from  an  increase 
based  on  an  estimated  enhancement  in  value. 

A  common  difficulty  in  preparing  annual  statements 
showing  the  exact  conditions  arises  from  nature's  indiffer- 
ence to  fiscal  years.  Peaches  will  ripen  in  early  summer, 
apples  in  the  fall,  and  oranges  in  the  winter ;  so  that,  when- 
ever a  balance  sheet  is  taken,  there  is  a  probability  that 
there  will  still  be  on  the  trees  some  unpicked  or  unripened 
crop  on  which  it  is  extremely  difficult  to  place  a  value.  The 
Income  account  is,  however,  entitled  to  such  credits  when 
they  exist,  and  a  conservative  estimate  of  any  ungathered 
crops  should  be  included  in  the  account. 

§  113.    Profits  from  Crops  Other  than  Fruit 

Profits  from  crops  other  than  fruit  so  seldom  affect  real 
estate  concerns  that  only  a  reference  to  them  is  necessary. 
Land  and  development  companies  are  sometimes  brought  in 
touch  with  these  profits  in  connection  with  demonstration 
farms  and  colonies,  in  which  event  special  accounts  are 
usually  kept  by  those  in  charge  of  the  farm  work,  rather  than 
by  the  real  estate  office. 


CHAPTER    XVI 

TIME    SALES— MORTGAGES 

§  114.    Time  Sales 

It  is  probably  true  that  cash  sales — the  simple  exchange 
of  real  estate  for  currency — form  a  very  small  proportion 
of  the  vast  number  of  transfers  of  real  estate  which  take 
place  annually  in  the  United  States. 

This  being  so,  the  sales  for  some  consideration  other 
than  currency  constitute  the  great  bulk  of  the  realty  sales  of 
the  country  and  are  of  sufficient  importance  to  require 
special  consideration.  Such  transactions  are  variously 
named,  as  sales  on  the  instalment  plan,  sales  on  deferred 
payments,  etc.,  etc.  For  the  sake  of  simplicity,  it  is  pro- 
posed to  consider  them  under  the  generic  title  of  "Time 
Sales."  It  may  be  that  this  expression  cannot  be  found  in 
the  dictionaries,  but  it  is  commonly  used  by  those  dealing 
in  real  estate,  and  is  descriptive  and  appropriate.  In  this 
book,  therefore,  the  expression  "Time  Sales"  is  used  to 
include  all  those  transactions  in  which  time  is  allowed  to 
complete  the  payment  of  the  consideration. 

§  115.    Classes  of  Time  Sales 

Time  sales  may  be  divided  into  the  following  classes: 

1.  Sales  where  the  vendor  conveys  title,  a  part  of  the 

purchase  money  being  secured  by  a  mortgage 
made  by  the  purchaser  to  the  vendor. 

2.  Transactions  in  which  the  vendor  agrees  to  convey 

title  to  the  purchaser  upon  certain  stipulated  con- 
ditions being  fulfilled.    The  forms  for  such  agree- 
141 


I42  REAL   ESTATE   ACCOUNTS 

ments  are  numberless,  but  for  the  sake  of  brevity 
they  will  all  be  classed  here  under  the  term 
contracts. 

3.  The  purchase  of  an  option  on  real  estate. 

4.  The  placing  of  deeds,  etc.,  in  escrow,  to  be  delivered 

when  certain  specified  conditions  have  been 
complied  with. 

§  116.    Mortgages 

From  an  accountant's  standpoint,  the  term  "mortgage" 
may  be  defined  as  the  pledging  of  property,  frequently  real 
estate,  as  security  for  the  repayment  of  a  specified  sum  of 
money  at  a  specified  time,  together  with  interest  thereon 
calculated  at  a  specified  rate  and  payable  at  a  specified  time 
and  place.  If  the  condition  be  complied  with  by  the  maker 
of  the  mortgage — the  mortgagor — the  pledge  becomes  void. 

The  forms  of  mortgages  and  the  laws  governing  them 
vary  so  greatly  in  the  various  states  that  only  such  general 
features  of  mortgages  can  be  considered  here  as  bear 
directly  on  accounts.  As  a  rule,  the  form  of  a  mortgage  is 
that  of  a  deed  conveying  the  fee  simple,  but  there  is  always 
preserved  to  the  mortgagor  an  "equity  of  redemption" ;  and 
before  considering  mortgaged  land  as  having  become  the 
property  of  the  mortgagee,  the  accountant  must  satisfy  him- 
self that  this  equity  of  redemption  has  in  some  legal  manner 
been  foreclosed,  forfeited,  cancelled,  or  surrendered.  This 
is  usually  all  that  an  accountant  need  ascertain  on  this  ques- 
tion, for  matters  beyond  this  belong  rather  to  the  legal  than 
to  the  accounting  profession.  An  outline  of  the  entries 
necessary  to  bring  mortgages  into  the  accounts  is  given  in 
Chapters  XII  and  XIII. 

Minor  modifications  in  the  form  of  a  mortgage  may 
appear,  according  to  the  ideas  of  the  attorney  drawing  the 
document.  None  of  these  modifications  affect  the  account- 


TIME   SALES— MORTGAGES  143 

ant,  whose  principal  interest  is  centered  upon  the  debt  which 
is  secured  by  a  mortgage  and  which  represents  the  considera- 
tion to  be  shown  on  the  books  of  account. 

In  order  to  perform  his  duties  properly,  however,  an 
auditor  must  be  familiar  with  the  general  and  local  require- 
ments governing  the  particular  mortgage  which  he  is 
examining,  and  he  should  be  able  to  say  whether  or  not  the 
legal  requirements  have  been  complied  with. 

The  principal  legal  requirements  may  be  stated  as 
follows: 

1.  The  correct  description  of  the  mortgagor  as  to 

name,  residence,  and  civil  condition. 

2.  The  proper  description  of  the  mortgagee. 

3.  The  proper  insertion  of  dates  wherever  necessary. 

4.  An  accurate  and  sufficient  description  of  the  prop- 

erty covered. 

5.  The  witnessing  and  the  execution  of  the  document 

in  accordance  with  statutory  requirements. 

6.  The  proper  recording  of  the  document  when  that  is 

necessary. 

7.  An  examination  of  the  notes  accompanying  the 

mortgage,  to  see  that  they  are  properly  dated 
and  executed  and  conform  to  the  body  of  the 
mortgage. 

§  117.    Mortgage  Notes 

The  form  of  mortgage  is  purely  a  legal  matter  and  needs 
but  little  consideration  here.  The  notes  secured  by  the 
mortgage  are,  however,  an  entirely  different  matter  and 
require  discussion  in  some  detail,  for  it  is  with  them  that  the 
accountant  is  chiefly  concerned.  Generally  speaking,  these 
notes  may  be  divided  into  two  classes :  ( i )  interest-bearing, 
(2)  non-interest  bearing. 


144 


REAL   ESTATE  ACCOUNTS 


$ Jacksonville,  Fla. 191. . 

after  date,  without  grace,  for  value  received, 

the  undersigned  promise. .  to  pay  to  the  order  of 

Dollars  ($ )   together 

with  interest  thereon  at  the  rate  of per  centum  per  annum  until 

maturity,  said  interest  being  payable 

according  to  the  tenor  of  interest  coupon  notes  of 

Dollars   ($ ) 

each,  attached  hereto  and  bearing  even  date  herewith,  both  principal 

and  interest  coupons  payable  at 

in  United  States  gold  coin  of  the 

present  standard  of  weight  and  fineness  or  its  equivalent. 

Each  maker  and  indorser  waives  the  right  of  exemption  under  the 
Constitution  and  laws  of  Florida,  and  each  maker  and  indorser  waives 
demand  protest  and  notice  of  maturity,  non-payment  or  protest,  and 
all  requirements  necessary  to  hold  each  of  them  liable  as  makers  and 
indorsers. 

It  is  further  agreed  that  the  undersigned  shall  pay  all  cost  of 
collection,  including  a  reasonable  attorney's  fee,  on  failure  to  pay  this 
note,  or  any  interest  coupon,  at  maturity.  This  note  shall  bear  interest 
at  the  rate  of  Ten  (10)  per  centum  per  annum,  from  the  date  of 
maturity  until  paid. 

This  note,  and  also  the  interest  coupons  attached,  are  to  be  con- 
strued according  to  the  laws  of  the  State  of  Florida,  where  they  are 
executed,  and  are  secured  by  a  mortgage  on  real  estate,  executed 
under  even  date  herewith  to  the  payee  of  this  note. 

Upon  failure  to  pay  any  interest  coupon  on  this  note,  when  due, 
or  if  any  of  the  conditions  and  requirements  in  said  mortgage  deed 
be  not  complied  with,  this  note,  at  the  option  of  the  holder,  shall 
become  due  and  payable. 


Form  42.    Mortgage  Note — Interest-Bearing 


TIME   SALES— MORTGAGES  145 

1.  There  are,  of  course,  many  varieties  in  the  forms  of 
notes  in  each  class,  but  the  note  shown  in  Form  42*  illus- 
trates the  essentials  of  the  interest-bearing  note. 

In  some  instances,  the  words  "on  or  before"  are  inserted 
at  the  beginning  of  the  note.  This  gives  the  maker  the 
right  to  pay  in  full  at  any  time,  and  if  such  an  addition  is 
made  to  the  note,  care  should  be  taken  to  see  that  it  is  shown 
on  the  records  in  the  books.  Attached  to  this  note  are  the 
necessary  coupons  (Form  43).  Attention  is  called  to  the 
size  of  this  coupon  (approximately  3/^X5  inches),  which 
in  practice  is  much  more  convenient  than  the  small  coupons 
generally  used.  Each  coupon  is  securely  attached  to  the 
body  of  the  note,  and  is  torn  off  along  the  perforated  line 
as  it  becomes  due. 

2.  It  will  be  seen  that  the  note  shown  in  Form  44,  if 
paid  at  maturity,  bears  no  interest.     It  is  used  when  it  is 
desired  to  have  a  definite  number  of  notes,  each  for  a  fixed 
amount,  the  total  of  the  series  being  equal  to  the  principal 
and  interest  of  the  loan. 

It  is  important  that  the  exact  amount  of  each  of  these 
notes  should  be  approved  by  the  accountant  before  they  are 
signed.  The  calculations  involved  are  somewhat  complicated 
--—as  are  most  calculations  involving  deferred  payments — 
for  the  reason  that  each  payment  is  composed  of  and  reduces 
both  principal  and  interest,  the  amount  by  which  each  is 
reduced  varying  with  each  note;  i.e.,  the  portion  applicable 
to  principal  increases,  and  the  portion  representing  interest 
decreases,  with  each  successive  payment. 

This  form  of  mortgage  note  is  similar  to  that  employed 
by  building  and  loan  societies,  most  of  which  draw  up  tables 
for  their  own  use  showing  the  amount  of  principal  remain- 
ing unpaid  at  the  end  of  each  year  or  other  period.  If  the 
note  is  not  paid  at  maturity,  it  is  usual  to  provide  for  the 

•Prepared  for  use  in  Florida  by  Frank  R.  Fleming,  Esq.,  of  the  Florida  Bar. 


I46  REAL   ESTATE   ACCOUNTS 

No.  of  Coupon Jacksonville,  Fla 191 

On  this  day  of  ,  A.D.  191 . . 

without   grace,    the    undersigned   promise.,    to   pay    to    the   order    of 


Dollars   ($ ) 

in  United   States   gold  coin   of  the  present   standard  of   weight   and 

fineness   or   its   equivalent,   at    

for  interest  due  on  that  day  according  to  the  tenor  of  a  principal  note  of 

Dollars  ($ ) 

of  even  date  herewith.  This  coupon  bears  interest  at  the  rate  of 
Ten  (10)  per  centum  per  annum  from  maturity  until  paid.  Value 
received. 


Form  43.    Mortgage  Coupon 


191.. 

months  after  date  I  promise  to  pay 

to  the  order  of  at  

the  sum  of  $ with  interest  after  maturity  at  the 

rate  of per  cent  per  annum. 

Value  received. 


This  note  is  secured  by  mortgage  on  real  estate  and  is  subject  to 
the  conditions  therein  contained. 

Form  44.     Mortgage  Note — Non-Interest  Bearing 


TIME   SALES— MORTGAGES  147 

payment  of  a  penalty,  either  by  naming  a  fixed  sum  or  by  a 
statement  that  the  note  shall  bear  interest  after  maturity. 

Many  forms  of  mortgage  note  contain  a  clause  to  the 
following  effect:  "This  note  is  secured  by  a  mortgage  on 
real  estate  and  is  subject  to  the  conditions  therein  con- 
tained." 

Attention  is  called  to  the  words  in  italics,  for  such  a 
qualification  might  seriously  affect  the  negotiability  of  the 
instrument — a  matter  of  importance  to  the  accountant,  and 
one  which  should  be  considered  by  the  attorney  responsible 
for  the  drafting  of  the  papers. 

While  in  New  York  and  a  few  other  states  it  is  cus- 
tomary to  use  a  bond  instead  of  a  note,  it  is  believed  that  the 
note  is  used  in  by  far  the  greater  part  of  the  United  States. 
In  either  event  the  points  to  be  covered  are  similar,  and 
local  usage  will  determine  the  form  to  be  used. 

§  1 1 8.    The  Instalment  Mortgage 

There  are  certain  points  peculiar  to  this  form  of  mort- 
gage which  are  used  as  arguments  for  and  against  its  adop- 
tion. Arguments  in  favor  of  this  form  are  as  follows: 

1.  The  security  is  in  a  definite  form,  and  as  each  pay- 
ment is  made,  its  value  increases  in  proportion  to  the  amount 
of  the  debt. 

2.  It  enables  the  purchaser  to  buy  on  terms  as  easy  as 
under  a  contract,  and  at  the  same  time  gives  the  vendor  a 
security  which  he  can  easily  hypothecate   (or  use  as  col- 
lateral for  temporary  loans,  or  for  more  permanent  loans, 
such   as   debentures,   etc.)    to   greater   advantage   than   a 
contract. 

3.  Once  the  terms  are  agreed  upon,  there  is  no  further 
calculation  of  interest  to  be  made. 

4.  Under  the  laws  of  most  states,  the  mortgage  notes 


I48  REAL   ESTATE  ACCOUNTS 

can  be  made  to  bear  interest  after  maturity  without  render- 
ing the  vendor  guilty  of  usury. 

The  arguments  usually  urged  against  this  form  of  mort- 
gage are  the  following: 

1.  The  vendor  receives  his  principal  in  instalments  and 
may  have  difficulty  in  quickly  reinvesting  such  small  sums. 

2.  The  difficulty  in  determining  a  fair  settlement  if  the 
purchaser  makes  payments  in  advance,  or  if  he  anticipates 
the  payment  of  the  entire  amount. 

3.  The  difficulty  in  arriving  at  the  proper  amount  of 
each  monthly  payment,  or  if  that  is  fixed,  in  ascertaining 
the  number  of  such  payments. 

The  first  objection  applies  equally  to  all  sales  where 
partial  payments  are  made  periodically.  The  answer  to  it 
is  that  such  a  plan  greatly  enlarges  the  number  of  possible 
purchasers. 

The  second  and  third  objections  are  more  formidable 
in  theory  than  in  practice.  An  elementary  knowledge  of 
mathematics  will  render  possible  the  solution  of  the  two 
problems  involved. 

The  advantages  of  this  method  of  sale  are  so  obvious 
that  they  need  not  be  enlarged  upon.  The  system  should 
be  more  generally  used.  Possibly  its  lack  of  popularity  has 
been  caused  by  its  similarity  to  what  is  usually  known  as 
the  "building  and  loan  plan,"  which  is  much  disliked  in 
some  quarters.  Such  prejudice  should  not  receive  serious 
consideration. 

§  119.    Annuity  Tables 

Reference  to  good  annuity  tables*  will  usually  solve  the 
questions  which  arise  in  connection  with  instalment  mort- 


•Stubbins*  Annuity  Tables  will  be  found  advantageous  in  this  connection  from 
the  fact  that  they  show  monthly  payments — something  which  few,  if  any,  of  the 
other  tables  do. 


TIME   SALES— MORTGAGES  149 

gages,  i.e.:  being  given  the  purchase  price  and  the  rate  of 
interest — 

1.  How  many  payments  of  a  stated  sum  are  necessary 

to  liquidate  principal  and  interest?     Or, 

2.  The  number  of  payments  being  agreed  upon,  what 

should  be  the  amount  of  each  payment? 

As  a  rule,  a  concern  sells  on  a  fairly  uniform  basis.  For 
instance,  it  will  accept  in  payment  for  sales,  say,  120  monthly 
payments  of  $i  1.12  each,  for  each  $1,000  of  purchase  money 
with  interest  at  6%  per  annum.  In  such  cases  a  table  can 
easily  be  constructed  showing  the  division  of  each  payment 
into  principal  and  interest,  so  that  at  any  time  the  amount 
of  principal  paid  in  can  be  determined. 

For  example,  reference  to  the  table  shows  that  120 
monthly  payments  of  $11.12  will  pay  off  a  principal  debt  of 
$  1,000  with  interest  at  6%  per  annum.  The  interest  for 
the  first  month  on  $1,000  is  $5,  and  the  principal  included 
in  the  first  payment  is  therefore:  $11.12  —  $5.00  =  $6.12. 
The  interest  for  the  second  month  is  to  be  computed  on 
$1,000  —  $6.12  =  $993.88,  and  amounts  to  $4.97;  the 
principal  included  in  the  second  payment  is  therefore:  $11.12 
—  $4.97  =  $6. 1 5. 

The  rule  for  the  construction  of  such  tables  is  as  follows: 
Having  found  the  amount  of  principal  contained  in  the  first 
payment,  multiply  this  by  i  plus  the  ratio  of  interest  for 
one  month.  At  the  rate  of  6%  per  annum,  the  monthly 
rate  would  be  .005.  If  the  principal  part  of  the  first  pay- 
ment is  $6.12,  the  amount  of  the  principal  in  the  second  pay- 
ment will  be  found  by  multiplying  this  amount  by  1.005, 
the  same  process  being  repeated  until  the  table  is  com- 
pleted. 

The  amount  of  principal  included  in  any  given  number 
of  payments  may  also  be  found  by  reference  to  annuity 


REAL    ESTATE   ACCOUNTS 


tables  or  by  algebra,  these  amounts  being  in  geometric  pro- 
gression.   The  table  will  appear  as  follows: 


Principal 

Payment 

Amount 

Interest 

Principal 

Unpaid 

I 

$11.12 

$5.00 

$6.12 

$993.88 

2 

II.  12 

4-97 

6-15 

98773 

3 

II.  12 

4-94 

6.18 

981.55 

4 

II.  12 

4.91 

6.21 

975-34 

5 

II.  12 

4.88 

6.24 

969.10 

§  1 20.    Change  of  Ownership 

In  connection  with  sales  secured  by  mortgage,  one  point 
is  sometimes  overlooked  which  is  usually  covered  in  con- 
tracts— that  is,  the  transfer  of  the  property  by  the  mort- 
gagor, and  the  consequent  change  of  debtor. 

Where  concerns  handle  a  large  number  of  purchase 
money  mortgages,  much  inconvenience  is  caused  by  transfers 
where  the  mortgage  is  assumed  by  a  third  party  without 
the  knowledge  of  the  mortgagee,  who  is  put  to  unnecessary 
trouble  in  finding  the  person  who  actually  pays  the  coupons 
as  they  fall  due.  This  difficulty  can  be  guarded  against  by 
the  insertion  in  the  mortgage  of  a  clause  obligating  the 
mortgagor  to  notify  the  mortgagee  of  any  change  of  owner- 
ship, the  wording  of  such  clause  depending  upon  the  form 
of  the  mortgage  itself. 

§  121.    Foreclosures 

In  all  business  dealings  in  mortgages,  there  sometimes 
arises  the  necessity  of  instituting  foreclosure  proceedings  or 
taking  some  other  steps  to  acquire  the  mortgaged  property. 
Occasionally  such  proceedings  require  considerable  time  for 
their  completion,  owing  to  delays  in  legal  processes,  to  the 
difficulty  in  communicating  with  parties  interested,  or  for 
various  other  reasons. 

In  these  cases,  it  is  sometimes  wise  to  transfer  such 


TIME   SALES— MORTGAGES  151 

mortgages  from  "Mortgages  Receivable"  to  "Mortgages  in 
Settlement,"  for  by  so  doing  the  former  account  will  always 
represent  mortgages  in  good  standing.  The  transfer  is  made 
by  a  journal  entry  of  the  following  form: 

Mortgages  in  Settlement $ 

To  Mortgages  Receivable $ 

To  transfer  mortgage  No in  course  of 

settlement. 

If  the  value  of  the  property  is  equal  to,  or  greater  than, 
the  principal  and  interest  and  charges,  these  latter  should 
be  included  in  the  journal  entry;  otherwise  they  should  be 
written  off  to  Profit  and  Loss. 

Occasionally  instances  occur  where  the  value  of  the 
mortgaged  property  is  less  than  the  amount  of  the  mortgage, 
through  an  original  overestimate  or  through  depreciation 
from  some  cause.  In  such  cases,  if  the  settlement  is  likely 
to  be  protracted  or,  as  sometimes  happens,  it  is  desired  to 
retain  the  lien  of  the  mortgage  rather  than  to  acquire  title, 
it  may  be  advisable  to  write  off  the  loss  immediately, 
instead  of  continuing  to  show  a  fictitious  asset.* 

For  example,  if  a  mortgage  for  $5,000  should  fall  in 
arrears  and  it  is  decided  to  foreclose,  the  value  of  the  prop- 
erty on  the  best  estimates  obtainable  being  only  $3,000,  the 
following  would  be  the  proper  entry: 

Mortgages  in  Settlement. $3,ooo 

Mortgage  Deficiency  Account 2,000 

To  Mortgages  Receivable $5,ooo 

For   mortgage    No in    settlement,    the 

estimated  value  being  $3,000. 

The  Mortgage  Deficiency  account  is  usually  written  off 
by  a  debit  entry  against  Surplus,  Reserve,  or  Profit  and 
Loss,  as  the  occasion  may  require. 


•Some  accountants  hold  that  nothing  should  be  charged  off  to  Profit  and  Loss 
until  sale  or  settlement  has  been  made. 


CHAPTER    XVII 


§  122.    Simple  Form  of  Contract 

The  term  "contract"  is  used  in  this  book  to  cover  the 
great  variety  of  forms  of  agreement  which  are  given  to 
purchasers,  or  prospective  purchasers,  of  real  estate,  and 
which  are  known  as  leases,  conditional  contracts  of  sale, 
bonds  for  title,  agreements,  contracts,  etc.  In  this  chapter 
the  words  "contract,"  "agreement,"  and  "lease"  are  all  used 
to  describe  an  agreement  providing  for  sale  on  the  instal- 
ment plan. 

Perhaps  the  simplest  form  of  such  agreement  is  one 
which  gives  the  prospective  purchaser  the  right  to  occupy 
certain  described  lands  for  a  specified  time,  and  also  the 
right  to  buy  those  lands  during  that  time  at  a  specified  price, 
provided  he  makes  the  required  payments.  These  payments 
may  consist  merely  of  interest  at  the  current  rate  on  the 
amount  of  the  purchase  price,  the  vendor  agreeing  that,  if 
all  conditions  are  complied  with  (including  the  payment  of 
the  purchasing  price),  he  will,  at  any  time  during  the  life 
of  the  lease,  deliver  a  deed  to  the  purchaser,  conveying  good 
title. 

There  are  many  varieties  of  contracts  more  elaborate 
than  this,  but  all  of  them  observe  the  principle  that,  upon 
the  conditions  specified  being  carried  out  by  the  purchaser, 
the  vendor  will  convey  title  to  him.  The  periodic  payments 
may  vary  to  any  extent,  the  usual  minimum,  as  in  the  case 
above  mentioned,  being  merely  interest  on  the  principal. 

152 


TIME   SALES— CONTRACTS  153 

§  123.    Conditions  Applying  to  Contracts 

The  following  points  affecting  the  business  side  of  con- 
tract sales  are  of  interest  to  the  accountant: 

1.  It  is  usual  to  state  clearly  when  payments  are  to  be 
made. 

2.  The  purchaser  usually  agrees  to  pay  all  taxes  and 
assessments  accruing  after  a  specified  date. 

3.  Restrictions  are  often  imposed  as  to  maintaining 
present  buildings  thereon  and  as  to  the  uses  to  which  they 
may  be  put. 

4.  All  buildings  are  usually  kept  in  repair  by  the  pur- 
chaser. 

5.  The  purchaser  is  usually  required  to  maintain  insur- 
ance in  favor  of  the  vendor,  for  an  amount  mentioned  in  the 
agreement. 

6.  The  purchaser  is  prohibited  from  assigning  the  con- 
tract without  the  written  consent  of  the  vendor. 

7.  The  purchaser  agrees  not  to  allow  any  encumbrance 
or  liens  to  be  placed  against  the  property. 

8.  It  is  generally  stated  that  failure  to  make  any  re- 
quired payment  when  due,  subjects  the  entire  agreement  to 
cancellation,  either  immediately,  or  after  a  specified  time, 
such  as  thirty,  sixty,  or  ninety  days. 

9.  The  vendor  usually  has  the  right  to  pay  any  assess- 
ments, etc.,  which  may  be  overdue,  and  to  charge  them  to 
the  purchaser  or  to  use  them  as  grounds  for  cancelling  the 
contract. 

10.  In  event  of  any  legal  proceedings  being  necessary, 
the  agreement  is  chargeable  with  all  the  expenses  connected 
therewith,  including  court  costs,  attorney's  fees,  and,  where 
required,  an  abstract  of  title. 

n.  All  payments  on  account  of  the  contract  must  be 
made  to  the  vendor  or  to  some  party  who  is  the  authorized 
representative  of  the  vendor. 


154 


REAL    ESTATE   ACCOUNTS 


12.  The  official  address  of  the   purchaser  is  usually 
given,  and  a  provision  inserted  that  notice  mailed  by  the 
vendor  to  him  at  that  address  shall  be  considered  a  proper 
notice  of  any  delinquencies,  etc. 

13.  It  is  provided  that  no  delay  on  the  part  of  the 
vendor  in. exercising  any  of  his  technical  rights  under  the 
agreement  shall  be  construed  to  be  a  waiver  of  any  of  his 
rights  thereunder. 

14.  The  agreement  is  usually  executed  in  duplicate  by 
both  parties,  each  retaining  one  copy. 

In  examining  such  contracts,  it  is  the  duty  of  the  ac- 
countant to  see  that  the  description  of  the  property  is  cor- 
rect and  in  conformity  with  that  shown  on  the  books  of 
account,  and  that  all  particulars  are  properly  entered  in  the 
contracts  ledger. 

§  124.    Precision  as  to  Amount  of  Sale 

Another  point  which  calls  for  care  is  a  definite  state- 
ment of  the  total  amount  of  the  sale.  For  example,  the 
agreement  may  be  granted  for  a  nominal  consideration  of 
$100,  and  may  provide  that,  on  the  payment  of  $1,000  by 
the  purchaser,  title  will  be  conveyed  to  him.  These  two 
amounts  usually  appear  in  different  parts  of  the  agreement, 
and  there  is  frequently  some  doubt  as  to  whether  the  origi- 
nal $100  is  to  be  included  in  the  $1,000  or  added  to  it.  It 
is  advisable,  therefore,  that  the  clause  stating  the  amount 
of  the  consideration  be  clearly  stated,  as  follows: 

"The  lessor  convenants  and  agrees  to  and  with  the  lessee  that, 
if  the  lessee  shall,  during  said  term,  well  and  truly  pay  the  rent 
hereby  reserved,  including  the  taxes  and  other  payments  for  which 
he  is  liable,  and  fully  and  promptly  perform  and  carry  out  each 
and  every,  the  convenants  and  undertakings  on  his  part,  and  if, 
during  the  term  of  this  lease,  the  lessee  shall  have  paid  the  lessor 

the  full  sum  of   Dollars, 

exclusive  of  the  sum  named  as  the  consideration  of  this  instrument, 


TIME   SALES— CONTRACTS  155 

with  interest  at  the  rate  of per  cent  per  annum  on  the 

unpaid  portion  of  said  purchase  price,  as  hereinbefore  provided, 
then  and  in  that  event  the  lessor  shall  convey  or  cause  to  be 
conveyed  to  the  lessee  a  good  and  sufficient  title  in  fee  to  the  lands 
herein  described." 

The  consideration  for  the  agreement  is,  of  course,  the 
first  payment  on  the  purchase. 

§  125.    Pass-Book  Contracts 

There  is  one  variety  of  contract  which  for  convenience 
may  be  called  the  "pass-book  contract,"  in  which  the  con- 
tract is  printed  on  the  first  pages  of  a  book  similar  to  a  bank 
pass-book,  the  description  being  inserted  with  a  pen,  and 
the  agreement  duly  executed.  Following  this  agreement 
there  are  blank  pages  on  which  to  enter  each  payment  as 
it  is  made  by  the  purchaser.  This  form  of  book  is  gen- 
erally used  in  handling  comparatively  small  subdivisions, 
where  the  general  description  may  be  printed  in,  the  only 
variation  being  the  number  of  the  lot  or  block  covered  by 
each  contract. 

It  is  possible  that  this  form  of  agreement  was  devised 
by  a  banker  who  had  been  accustomed  to  handle  savings 
bank  accounts.  Theoretically,  it  has  many  advantages,  for 
it  provides  for  a  complete  record  of  all  payments  made. 
In  practice,  however,  it  has  many  disadvantages,  for  these 
books  are  frequently  lost,  and,  still  more  frequently,  the 
purchasers  make  payment  of  an  instalment  without  the 
book.  In  many  instances  the  purchasers  of  some  one  tract 
are  scattered  over  the  entire  United  States,  and  even  over 
the  world,  and  it  is  then  impracticable,  of  course,  to  present 
the  book  when  each  payment  is  made.  The  value  of  the 
book  depends  upon  its  containing  each  and  every  payment, 
and  confusion  is  caused  by  any  omissions. 

Another  method  somewhat  similar  to  the  pass-book  plan 


I56  REAL    ESTATE  ACCOUNTS 

is  to  draw  a  lease  or  agreement  in  some  standard  form 
and  make  provision  on  the  back  thereof  for  entering  pay- 
ments made  by  the  purchaser,  but  the  objections  mentioned 
above  apply  equally  to  this  form. 

§  126.    Cancellation  of  Contracts 

It  is  well  for  the  owner  of  any  property  to  inform  him- 
self as  to  the  practice  of  the  courts  in  regard  to  the  can- 
celling of  contracts.  In  the  case  of  a  time  sale  secured  by 
mortgage,  the  deed  to  the  purchaser  and  the  mortgage  given 
by  him  to  the  vendor  are,  of  course,  both  recorded,  and  the 
agreement  can  be  cancelled  only  by  legal  proceedings,  or 
by  the  purchaser  giving  to  the  original  vendor — volun- 
tarily or  for  a  consideration — something  in  the  nature  of  a 
quitclaim  deed  to  the  property.  The  case  may  be  somewhat 
different  with  time  sales  under  contract.  It  frequently 
happens  that  such  contracts  are  not  acknowledged,  and 
therefore  cannot  be  placed  on  record;  or,  in  case  they  are 
acknowledged  and  could  be  recorded,  the  purchaser  may 
not  care  to  avail  himself  of  this  right.  In  such  instances 
there  is  nothing  on  record  to  show  that  the  sale  has  been 
made.  In  this  connection  it  may  be  contended  that  the 
contract  in  itself  is  sufficient  evidence  of  the  purchase;  yet 
it  is  true  in  many  instances  that  a  contract,  if  properly 
recorded,  is  a  stronger  guarantee  than  a  contract  which  has 
not  gone  through  this  formality. 

The  effect  of  recording  varies  in  different  states,  and 
nothing  more  can  be  said  here  beyond  the  suggestion  that 
those  interested  should  acquaint  themselves  with  the  laws 
prevailing  in  their  particular  state. 

Probably  the  original  reason  for  calling  such  contracts 
"leases"  was  the  hope  that,  in  case  of  a  delinquent  pur- 
chaser, resort  might  be  had  to  something  in  the  nature  of  a 
delinquent  tenant  act,  and  that  the  tenant  could  be  evicted 


TIME   SALES— CONTRACTS  157 

by  the  simple  proceedings  applicable  to  an  ordinary  tenant 
who  has  not  paid  his  rent. 

As  a  general  rule,  however,  the  courts  have  held  that 
under  such  agreements,  when  the  purchaser  has  made  pay- 
ments he  has  acquired  an  equity  of  redemption  of  which 
he  cannot  be  deprived  without  legal  proceedings  similar  to 
those  required  for  the  foreclosure  of  a  mortgage.  This 
condition  prevails  generally,  despite  the  many  efforts  of 
able  lawyers  to  draw  up  an  agreement  which  would  enable 
the  owner  to  regain  possession  of  his  property  without  ex- 
pense or  delay. 

In  practice  this  fact  is  frequently  disregarded.  In  a 
large  number  of  contract  sales,  the  property  sold  is  unim- 
proved and  the  purchaser  does  not  take  possession  of  it, 
does  not  fence  it,  or  take  any  other  steps  to  show  that  he 
has  an  interest  in  it.  He  may  make  a  few  payments  at  the 
beginning  of  the  contract  and  then  get  tired  of  the  transac- 
tion. Very  frequently  he  does  not  attempt  to  exercise  any 
rights  he  may  have,  and,  after  a  reasonable  time,  say  a  few 
months,  the  owner  may  regard  the  contract  as  closed  with- 
out taking  any  legal  proceedings.  In  many  instances  he 
merely  notifies  the  purchaser  that  the  contract  will  be  or 
has  been  cancelled,  closes  out  the  purchase  account  on  his 
books,  and  replaces  the  lot  on  his  selling  list.  It  is  astonish- 
ing to  discover  how  frequently  this  is  done  and  in  how  few 
instances  any  trouble  arises  to  the  vendor  through  such 
action. 

In  the  process  of  cancelling  a  contract  through  legal 
proceedings,  a  condition  may  arise  which,  though  some- 
what peculiar  and  not  infrequently  overlooked,  has  a  direct 
bearing  upon  the  form  of  contract  and  the  form  of  the 
account.  It  becomes  of  importance  only  in  instances  where 
the  purchaser  places  every  possible  obstacle  in  the  way  of 
the  owner  who  endeavors  to  obtain  his  rights,  and  it  is 


REAL    ESTATE   ACCOUNTS 

therefore  necessary  for  him  to  take  advantage  of  every 
point  in  his  favor.  The  point  is  that,  time  being  the  es- 
sence of  such  contracts,  if  a  purchaser  fail  to  make  his  pay- 
ments as  called  for  by  the  terms  of  the  contract,  the  entire 
principal  sum  (and  not  merely  those  payments  which  are 
in  arrears)  becomes  due  and  payable. 

Under  such  circumstances,  it  is  sometimes  wise  for  the 
owner  to  enter  suit  for  the  entire  purchase  price,  and  by 
so  doing  place  upon  the  purchaser  the  burden  of  proving 
each  and  every  payment  he  has  made — thus  adding  very 
materially  to  the  difficulty  of  the  defense.  In  some  states 
such  a  procedure  would  not  be  allowable,  and  the  suit  must 
be  brought  for  the  balance  of  the  purchase  price,  the  amount 
being  verified  under  oath.  In  any  event  it  is  important 
carefully  to  consider  the  exact  terms  of  each  contract  in 
which  the  concern  is  interested,  whether  a  buying  or  a 
selling  contract. 

§  127.  Comparative  Advantages  of  Mortgages  and  Contracts 

The  owners  of  real  estate,  particularly  of  subdivision 
property,  are  frequently  in  doubt  as  to  the  best  method  of 
selling,  and  especially  as  to  the  relative  advantages  of  sell- 
ing under  mortgages  and  under  contracts,  and  the  legal 
aspect  of  this  question  should  be  discussed  with  the  owners' 
attorneys.  The  best  attorneys,  however,  sometimes  fail  to 
realize  the  practical  conditions.  The  main  difference  be- 
tween a  mortgage  and  a  contract  is  that,  in  the  case  of  a 
mortgage,  the  purchaser  obligates  himself  to  make  certain 
payments  at  certain  times,  and  gives  his  note  or  notes  to 
that  effect.  Should  he  fail  to  comply  with  these  conditions, 
proceedings  may  be  brought  against  him ;  and  if  he  continues 
in  his  failure  to  make  payments,  judgment  against  him  will 
probably  be  secured.  The  value  of  this  judgment  depends 
entirely  upon  the  financial  standing  of  the  purchaser,  and, 


TIME   SALES— CONTRACTS  159 

in  the  case  of  subdivision  business,  the  responsibility  of 
many  of  the  purchasers  is  so  doubtful  that  a  judgment  is 
of  little  or  no  value. 

On  the  other  hand,  under  many  forms  of  contract  the 
purchaser  is  not  obligated  to  continue  the  payments.  In 
other  words,  if  he  fails  to  comply  with  the  conditions  of 
the  contract,  he  loses  what  he  has  put  into  the  property, 
but  the  vendor  cannot  obtain  a  judgment  against  him  or 
in  any  way  compel  him  to  pay  the  balance. 

Under  these  conditions,  it  is  obvious  that  it  is  much 
easier  for  a  sales  department  to  handle  a  sale  of  property 
under  contract  than  under  mortgage,  although  such  insti- 
tutions as  trust  companies,  or  others  lending  moneys  on 
security,  have  a  strong  preference  for  mortgages,  based 
of  course  upon  the  personal  obligation  carried  by  the 
mortgage. 

§  128.    Contract  Statements 

The  advisability  of  sending  out  regular  statements  of 
account  to  purchasers  under  contracts  must  be  left  to  the 
judgment  of  the  vendor.  The  sending  of  such  statements 
to  those  who  are  in  arrears  might  in  some  cases  tend  to 
weaken  the  position  of  the  vendor  should  he  desire  to  can- 
cel the  contract.  The  best  practice  is  to  inform  each  pur- 
chaser that  he  may  have  a  complete  statement  of  his  ac- 
count whenever  he  asks  for  it,  and  to  make  a  memorandum 
on  his  ledger  account  each  time  such  a  statement  is  ren- 
dered. 

§  129.    Contract  Accounts 

It  will  be  seen  that  the  general  contracts  ledger  shown 
in  Form  n  (§20)  provides  for  one  account  only  for  each 
contract,  this  account  receiving  all  entries  relating  to  prin- 
cipal, interest,  and  other  charges. 


REAL   ESTATE   ACCOUNTS 

This  is  more  convenient  than  an  attempt  to  separate  the 
two  kinds  of  entries,  as  provided  for  on  the  mortgages  re- 
ceivable ledger  (Form  8,  §  18).  The  reason  is  that  in  most 
cases  the  contract  provides  for  a  minimum  payment  each 
month,  or  other  fixed  period,  and  for  the  calculation  of 
interest  periodically.  Under  such  conditions,  each  payment 
might  be  regarded  as  being  composed  of  principal  and  in- 
terest, as  in  the  case  of  building  and  loan  mortgages  de- 
scribed in  §  117. 

Such  contracts,  however,  have  been  construed  by  some 
courts  to  mean,  under  the  above  conditions,  that  the  pay- 
ments made  in  any  six  months  are  to  be  applied  first  to 
the  liquidation  of  the  interest  calculated  at  the  end  of  that 
six  months  on  balance  remaining,  and  then  to  carry  any 
other  charges,  such  as  taxes,  etc.,  the  final  balance  to  be 
applied  against  the  principal.  It  will  be  seen  that  the  keep- 
ing of  an  account  in  such  form  is  complicated  and  consists 
of  the  following  steps : 

1.  Charging    the    Principal    account    with    principal 

amount  at  the  time  the  sale  is  made. 

2.  Crediting  the  Income  account  with  monthly  pay- 

ments. 

3.  Charging  the  Income  account  with  charges  paid 

during  the  six  months. 

4.  Charging  the  Income  account  with  interest  for  six 

months. 

5.  Closing  the  Income  account  every  six  months ;  and 

if  the  balance  is  a  credit,  transferring  it  to  the 
credit  of  the  Principal  account,  but  if  a  debit, 
carrying  it  forward  to  the  Income  account  for 
the  next  period. 

The  following  example  will  illustrate  these  entries  where 
the  balance  of  Income  account  is  a  credit : 


TIME   SALES— CONTRACTS  161 


Jan.      I 
Feb.     i 

Principal  
Cash  

Principal 
Dr.            Cr. 

.      $1,000.00      

Income 
Dr.          Cr. 

$20.00 

Mar.     I 

H 

20.00 

Apr.     i 

H 

• 

2O.OO 

"        10 

Insurance  Paid  

$4^.00 

May     i 

Cash  

20.00 

June     i 

« 

20.00 

"        30 

* 

20.00 

Interest 27.90 

30  Balance  of  Income 
account  transferred 
to  Principal  account  $47.10  47.10 


$120.00   $120.00 

Such  details  greatly  add  to  the  labor  of  bookkeeping 
where  a  large  number  of  accounts  are  involved,  and,  as  a 
matter  of  fact,  in  practice  the  purchaser  usually  wishes  to 
know  merely  the  total  balance  remaining  unpaid. 

Let  it  be  assumed  that  the  above  pro  forma  account 
complies  with  strict  legal  requirements,  and  is  such  as  would 
be  called  for  in  the  event  of  legal  proceedings  being  brought 
to  cancel  the  contract.  But  such  contracts  are  made  for  the 
purpose  of  effecting  sales,  and  not  for  the  promotion  of 
litigation ;  and  the  number  of  contracts  taken  to  court  forms 
a  very  small  proportion  of  the  number  issued.  Under  these 
circumstances,  it  is  best  to  keep  the  entire  account  as  pro- 
vided in  the  general  contracts  ledger  of  Form  n  (§  20), 
and,  when  litigation  ensues,  to  make  up  the  account  in  the 
second  and  more  detailed  manner. 

Little  attention  need  be  given  to  the  argument  that,  un- 
der such  practice,  the  account  as  rendered  in  court  would 
differ  from  the  ledger  account,  for  the  reason  that  the  ledger 
is  not  a  book  of  original  entry,  but  merely  a  convenient 


REAL   ESTATE   ACCOUNTS 

method  of  collecting  and  arranging  entries  originating  in 
other  books.  In  such  a  case  the  contract  itself  would  form 
the  basis  of  any  argument,  and  the  cash  book  would  show 
all  receipts  thereon. 

The  general  subject  of  interest  on  contracts  is  discussed 
in  Chapter  XIX. 


CHAPTER    XVIII 
OPTIONS 

§  130.    Nature  of  an  Option 

An  option,  as  understood  in  connection  with  real  estate, 
is  an  agreement  which  conveys  the  exclusive  right  to  pur- 
chase a  definite  piece  of  property  for  a  stipulated  price 
within  a  specified  time.  In  other  words,  the  term  "option" 
is  used  to  "express  the  privilege  given  to  conclude  a  bar- 
gain at  some  future  time  at  a  price  agreed  upon." 

THE    ALPHA    LAND    COMPANY 
NOCATEE,  GEORGIA 

Option  No 191 .. 

Received  of 

The  sum  of Dollars 

FOR  AN  OPTION  for  30  days  at  $ 

on    


At  expiration  of  this  option  it  can  be  renewed  for  30  days  upon 
payment  of  $ ,  and  so  on,  month  by  month.  It  is  under- 
stood that  you  acquire  no  interest  in  the  property  until  the  option  pay- 
ments shall  aggregate  the  sum  of  $ and  this  option  is 

forfeited  should  you  fail  to  renew  it  month  by  month  as  herein  pro- 
vided. When  a  total  of  $ has  been  so  paid,  THE  ALPHA 

LAND  COMPANY  will  give  a  lease  to  the  property;  and  when  you  have 
complied  with  all  the  terms  of  said  lease,  it  will  give  a  deed  conveying 
all  its  right,  title  and  interest  in  and  to  the  lot. . .  hereinabove  described. 

THE  ALPHA  LAND  COMPANY, 

$ B 

(This  receipt  made  in  duplicate) 

Form  45.    Option 

NOTE:  When  required,  provisions  as  to  roadways,  building  restric- 
tions, etc.,  may  be  included  in  the  option. 

163 


REAL   ESTATE  ACCOUNTS 

Options  were  originally  employed  in  cases  where  the 
purchaser  desired  time  in  which  to  raise  the  purchase  money, 
to  complete  an  investigation,  to  confer  with  partners,  or  for 
some  similar  reason.  Of  late  years,  however,  they  have 
been  used  in  some  instances  by  the  owners  of  subdivision 
properties  as  a  preliminary  to  a  regular  contract.  The  plan 
is  useful  where  the  purchaser  does  not  wish  to  make  the 
full  first  payment  required  for  a  contract,  and  the  vendor 
does  not  desire  to  draw  up  regular  papers  until  such  pay- 
ment is  made. 

If  this  plan  is  applied  to  a  rent-producing  house  which 
the  holder  of  the  option  is  allowed  to  occupy  during  the 
life  of  his  option,  care  must  be  taken  to  see  that  the  rent  is 
properly  treated  in  the  accounts.  If  the  rights  under  the 
option  are  exercised,  the  rent,  under  the  usual  arrangement, 
will  form  a  part  of  the  purchase  price.  If  the  option  is 
allowed  to  lapse,  the  monthly  payments  remain  as  rent.  In 
such  cases,  the  simplest  plan  is  to  enter  these  receipts  as 
rent,  and,  when  a  contract  is  given,  to  transfer  the  total  of 
such  payments  from  Rent  account  to  Contracts  account. 
Form  45  is  a  typical  form  of  option  and  is  self-explanatory. 

§  131.    Accounting  Treatment  of  Options 

The  bookkeeping  entries,  save  as  to  rent-producing 
properties,  should  credit  "Options"  with  option  payments 
ns  they  are  received;  and  if  the  number  of  such  transactions 
Warrants  it,  a  sub-ledger  should  be  opened  for  individual 
accounts  of  option  holders.  The  commission  ledger  (Form 
12,  §  21 )  provides  for  agents'  commissions  in  such  cases. 

In  the  event  of  an  option  being  allowed  to  lapse,  the 
amounts  paid  in  should  be  credited  direct  to  Profits  ac- 
count; and  in  the  event  of  an  option  being  exercised,  the 
consideration  therefor  having  been  paid,  the  amount  so  paid 
is  transferred  to  the  credit  of  Real  Estate,  Contracts,  or 


OPTIONS  165 

other  appropriate  account.  In  no  case  does  any  liability 
attach  to  the  purchaser,  but  the  vendor  obligates  himself 
to  give  title,  or  some  form  of  guaranty  for  title,  upon  the 
conditions  being  fulfilled. 

§  132.    Refusals 

An  option  differs  in  the  last  point  above  mentioned  from 
what  is  generally  known  as  a  "refusal."  This  may  be  de- 
scribed as  a  promise  made  by  the  owner  to  give  the  holder 
the  first  choice  on  a  certain  property;  a  promise  that  the 
owner  will  not  dispose  of  the  property  to  another  party 
until  the  holder  of  the  refusal  has  been  notified.  This  latter 
is  usually  allowed  a  short  time  after  notice,  say  twenty- 
four  hours,  in  which  to  close  or  relinquish  the  bargain.  Re- 
fusals are  usually  given  without  any  consideration,  for  the 
paper  carries  with  it  but  a  slight  obligation,  and  in  practice 
it  is  found  that  the  existence  of  a  refusal  often  stimulates 
other  purchasers.  If  any  consideration  does  pass,  it  is  en- 
tered on  the  books  as  in  the  case  of  options. 

§  133.    Deeds  in  Escrow 

Signing,  sealing,  and  delivery  are  all  essential  to  a  deed. 
It  is  sometimes  desired  that  delivery  be  not  made  until 
some  future  date,  or  until  certain  conditions  have  been  per- 
formed. In  such  cases  the  deed  is  placed  in  escrow;  that 
is,  it  is  handed  over  to  a  third  party  to  be  held  by  him 
until  the  requirements  are  fulfilled,  and  these  are  usually 
committed  to  writing  and  deposited  with  the  deed. 

In  such  cases  all  entries,  except  those  showing  receipt 
of  the  consideration,  are  made  in  the  records  as  if  the 
transaction  were  consummated,  for  all  papers  have  been  exe- 
cuted; but  a  notation  giving  the  particulars  of  the  escrow 
is  made  on  the  real  estate  ledger.  If  the  escrow  is  broken, 
such  entries  are  cancelled.  If  it  is  carried  out,  the  con- 
sideration is  then  entered  on  the  books. 


CHAPTER    XIX 

INTEREST 

§  134.    Mortgage  Interest 

Mortgage  interest  is  that  accruing  upon  the  unpaid  por- 
tions of  the  purchase  money  represented  by  notes  secured 
by  mortgages  or  provided  for  in  a  contract.  The  simplest 
form  in  which  interest  on  mortgages  appears  is  shown  in  the 
mortgage  coupon  of  Form  43  (  §  117). 

In  connection  with  interest  on  mortgage  notes,  two 
separate  and  distinct  facts  must  be  noted:  first,  that  the  in- 
terest becomes  due  at  a  fixed  time,  and  second,  that  this 
interest  is  paid  to  the  holder  of  the  mortgage.  Revenue 
account  is  therefore  entitled  to  be  credited  when  the  interest 
falls  due,  but  the  mortgagor  is  not  credited  until  he  makes 
the  payment,  and  it  is  a  well-known  fact  that  interest  on 
mortgages  is  not  always  paid  promptly. 

In  order  to  record  these  two  phases  of  the  transaction, 
it  is  necessary  to  open  in  the  general  ledger  two  accounts 
which  may  be  designated  as  follows : 

1.  Mortgage  Interest  Receivable 

2.  Overdue  Mortgage  Interest  Receivable 

All  interest  as  it  accrues,  i.e.,  as  it  becomes  fully  earned, 
is  credited  to  the  first,  and  debited  to  the  second,  of  these 
accounts ;  and  when  that  interest  is  paid,  it  is  credited  from 
the  cash  book  to  the  second  account. 

A  method  for  recording  such  items  is  described  in  §  47. 
In  practice,  such  entries  may  be  made  at  the  beginning  of 
each  month  in  the  following  form : 

166 


INTEREST  !6/ 

Overdue  Mortgage  Interest  Receivable $245 

To  Mortgage  Interest  Receivable $245 

For  interest  falling  due  in  the  month  of , 

as  follows: 

Mortgage  82,  Jones,          due  Jan.  10 $50 

97,  Smith,          "       "      15 75 

105,  Robinson,     "       "     30 120 


$245 

The  account  "Mortgage  Interest  Receivable"  is  thus 
composed  entirely  of  credit  items,  the  total  amount  being 
carried  to  Profit  and  Loss  upon  the  closing  of  the  books 
(§§  212,  213). 

As  will  be  seen,  this  account  is  an  income  account  show- 
ing the  total  interest  of  this  class  earned.  It  is  therefore 
a  matter  of  importance  to  see  that  a  proper  record  is  kept 
of  all  such  interest  coming  due,  and  for  this  purpose  a 
mortgage  interest  register  similar  to  Form  39  (§47)  is  pro- 
vided. In  this  record  each  mortgage  should  be  entered  as 
it  is  received  and  the  interest  be  entered  in  the  proper 
columns  to  indicate  the  months  in  which  it  falls  due.  On 
the  first  of  each  month,  the  record  is  examined  to  see  that 
the  last  mortgages  received  are  entered ;  the  items  appear- 
ing to  accrue  during  the  ensuing  month  are  checked  to 
prove  their  correctness,  and  to  determine  whether  or  not 
all  payments  of,  or  reductions  in,  principal  have  been  al- 
lowed when  calculating  the  interest  due.  The  column  is 
then  added,  and  the  total  forms  the  basis  of  the  journal 
entry  shown  above. 

The  Overdue  Mortgage  Interest  Receivable  account  con- 
tains debit  entries  corresponding  to  the  above-mentioned 
credits,  and  credit  entries  showing  all  interest  actually  paid, 
the  balance  being  the  interest  accrued  but  unpaid,  which  ap- 
pears in  the  balance  sheet  as  an  asset.  However,  it  is  held 


:68  REAL    ESTATE   ACCOUNTS 

by  some  accountants,  that  wherever  a  balance  sheet  and  a 
profit  and  loss  statement  are  made  up,  all  interest  accrued 
should  be  computed  and  placed  on  the  books. 

§  135.    Interest  Adjustments 

It  frequently  happens  that  interest  on  mortgages,  al- 
ready charged,  is  either  reduced  or  cancelled,  and  in  such 
cases  debit  items  are  brought  into  the  Mortgage  Interest 
Receivable  account  by  the  following  entry: 


Mortgage  Interest  Receivable $ 

To   Overdue   Mortgage   Interest   Receiv- 
able      $ 

To  cancel   (or  reduce)   interest  charged  on 
mortgage  No $ 

As  explained  in  §  18,  all  entries  made  in  the  general 
ledger  to  the  Overdue  Mortgage  Interest  Receivable  ac- 
count should  also  be  posted  to  the  sub-ledgers. 

A  slight  variation  from  the  form  of  note  and  coupon 
in  Forms  42,  43  (§  117)  must  be  made  when  the  princi- 
pal is  divided  into  a  number  of  equal  parts  due  at  equal 
intervals,  each  part  being  represented  by  a  note  in  which 
there  is  included  interest  computed  to  the  date  of  that 
note. 

For  example,  a  mortgage  is  given  to  secure  $3,000,  pay- 
able in  three  equal  instalments  due  at  intervals  of  one  year, 
bearing  interest  at  the  rate  of  6%  per  annum.  The  notes — 
maturing,  respectively,  one,  two,  and  three  years  from  date 
— are  as  follows : 

$  1,000  +  interest  on  $3,000  for  I  year  =  $1,180 
1,000  +  "  "  2,000  "  i  "  =  1,120 
1,000  -f-  "  "  1,000  "  i  "  =  i  ,060 

$3,360 


INTEREST  T69 

The  foregoing  indicates  the  method  of  entering  such 
notes,  care  being  taken  to  set  forth  the  fact  that  $3,000  is 
principal  and  $360  is  interest. 

§  136.    Unearned  Interest 

We  now  come  to  the  second  class  of  mortgage  interest, 
where  interest  on  the  entire  mortgage  is  calculated  at  the 
beginning,  added  to  the  principal,  and  the  sum  divided  into 
a  number  of  equal  parts.  This  method  is  similar  to  that 
frequently  used  by  building  and  loan  associations.  It  is 
important  to  ascertain  the  exact  amount  of  each  of  the  items, 
principal  and  interest,  which  compose  the  total  amount  rep- 
resented by  the  notes.  The  various  methods  of  doing  this 
will  be  considered  later.  The  general  form  of  entry  is  as 
follows : 

Mortgages  Receivable $ 

To  Real  Estate $ 

"    Unearned  Interest.. 


It  will  be  seen  that  Mortgages  Receivable  account  is 
debited  with  the  total  of  principal  and  interest,  for  the  rea- 
son that  these  are  represented  by  definite  notes,  or  some- 
times by  an  obligation  to  make  a  specified  number  of  pay- 
ments, the  actual  execution  of  the  notes  being  dispensed 
with  on  account  of  the  labor  involved,  in  which  case  the 
text  of  the  mortgage  is  changed  to  correspond. 

The  discussion  in  Chapter  XX  of  real  estate  profits  ac- 
tually earned,  emphasizes  the  importance  of  keeping  each 
class  of  transaction  distinct.  With  this  in  view,  it  is  ad- 
visable to  place  by  itself  all  such  interest  as  that  now  being 
dealt  with,  and  to  keep  it  distinct  and  in  a  separate  account 
from  ordinary  Mortgage  Interest  and  from  Interest  and 
Discount.  The  name  "Unearned  Interest"  is  suggested  for 
this  account  as  being  both  appropriate  and  explanatory. 


J--Q  REAL    ESTATE   ACCOUNTS 

§  137.    Unearned  Interest — Methods  of  Calculating 

There  are  three  methods  of  calculating  this  "unearned" 
interest : 

1.  By  a  rough  averaging  of  the  time,  i.e.,  the  life,  of 

the  mortgage. 

2.  By  reference  to  tables. 

3.  By  mathematical  calculation. 

The  first  is  a  rough-and-ready  plan  which  is  frequently 
adopted  but  which  is  not  accurate.  It  is  based  upon  an 
average  of  the  interest,  and,  instead  of  charging  interest 
at  the  nominal  rate  for  the  entire  period,  it  is  charged  at 
that  rate  for  one-half  the  period,  and  this  amount  is  added 
to  the  principal.  The  sum  is  then  divided  by  the  number 
of  payments  to  be  made. 

For  example,  what  would  be  the  amount  of  each  monthly 
payment  in  order  to  pay  off  $1,000  in  ten  years,  interest 
at  6%  ? 

The  simple  interest  for  half  the  period,  i.e.,  5  years  at 
6%  per  annum  =  30%  of  the  principal ;  the  number  of 
payments  is  120. 

30%  of  $1,000  =  $300 

$1,000  +  $300 
=  $10.833,  the  monthly  payment 

For  the  second  method,  there  are  published  numerous 
tables  showing  present  values  of  annuities,  and  most  of  the 
problems  occurring  in  practice  may  be  solved  by  their  use. 
As  rules  are  always  attached  to  each  set  of  such  tables, 
showing  the  manner  of  using  them,  this  need  not  be  dis- 
cussed here.  Most  tables  in  use,  however,  are  based  on 
quarterly,  half-yearly,  or  annual  payments,  and  it  is  fre- 
quently necessary  to  base  calculations  upgn.  monthly  pay- 


INTEREST  i;i 

ments,  in  which  case  special  tables  must  be  used.*  Before 
tables  can  be  used  we  must  know  whether  the  interest  is  to 
be  charged  half-yearly  or  monthly,  and  if  the  latter, 
whether  each  monthly  payment  is  to  be  made  on  the  first 
or  the  last  day  of  each  month. 

The  third  method  of  determining  the  monthly  payments 
by  mathematical  calculation  involves  the  use  of  complicated 
formulae,  and  sometimes  logarithms  —  matters  beyond  the 
scope  of  the  present  work.  The  results  obtained  coincide 
with  those  given  by  any  reliable  tables;  but  by  means  of 
formulae  it  is,  of  course,  possible  to  answer  any  question 
which  may  arise,  whereas  the  tables  can  only  be  used  for 
those  questions  in  which  occur  certain  definite  periods. 

Taking  the  example  just  given,  the  tables  or  the  mathe- 
matical calculations  give  us  the  following  results : 

1.  If  interest  be  reckoned  on  half-yearly  balances, 

ignoring  the  fact  that  a  payment  has  been 

made  each  month $11.23 

2.  If  each  payment  be  made  on  the  last  of  the 

month,  and  interest  be  allowed  thereon....      11.12 

3.  If  payments  be  made  on  the  first  of  each  month, 

and  interest  be  allowed  thereon 11.01 

It  will  be  seen  that,  by  using  different  methods  the  re- 
sults may  vary  as  much  as  39  cents  on  each  payment  (i.e., 
$11.23  —  $I0-84),  or  a  total  of  $46.80  on  the  principal. 
If  real  estate  dealers  realized  more  fully  the  existence  and 
amount  of  these  differences,  they  would  undoubtedly  take 
the  necessary  trouble  to  have  accurate  calculations  made. 
As  a  matter  of  fact,  under  the  first  method,  the  seller  does 
not  receive  the  percentage  which  he  thinks  he  is  getting, 
i.e.,  6%  in  the  instance  given. 

*See  Stubbins'  "Tables  of  Present  Value  of  Annuities,"  an  English  work. 


REAL    ESTATE   ACCOUNTS 

§  138.     Unearned  Interest — Alternative  Methods  of  Calcu- 
lating 

While  the  method  of  calculating  interest  above  outlined 
is  correct,  it  is  extremely  inconvenient  in  an  office  where 
there  are  many  contracts  involving  such  interest  calcula- 
tions, and  various  attempts  have  been  made  to  simplify  mat- 
ters. One  plan  consists  in  calculating  the  interest  half- 
yearly  on  fixed  dates,  these  dates  being  the  same  in  all  con- 
tracts of  one  class.  This  reduces  the  work  of  the  book- 
keeper, inasmuch  as  it  brings  all  such  interest  calculations 
at  two  stated  times  each  year  instead  of  scattering  them 
through  every  month  of  the  year. 

Another  plan  which  has  been  adopted  with  some  success 
is  to  calculate  the  interest  every  six  months  on  the  balance 
then  unpaid.  This  is  convenient  for  the  bookkeeper,  as  it 
enables  him  to  take  his  monthly  trial  balance  and  simply 
calculate  the  interest  on  each  amount  shown  thereon.  An 
example  of  such  a  calculation  is  given  in  §  139. 

The  effect  of  this  method  of  calculating  the  interest  is 
far-reaching  —  more  so  than  would  appear  at  first  sight. 
For  instance,  if  a  purchaser  made  a  substantial  payment 
on  the  last  day  of  the  half  year,  he  would,  under  the  above 
arrangement,  save  half  a  year's  interest  on  that  payment; 
and  the  result  to  the  vendor  is  that,  instead  of  realizing 
an  8%  interest,  he  realizes  perhaps  7l/2%.  There  is  still 
another  aspect  to  be  considered.  If  a  purchaser  does  not 
make  any  payments  for  a  year  or  two,  and  interest  is 
added  on  the  outstanding  balance  each  half  year,  he  is,  of 
course,  being  charged  compound  interest,  which  is  illegal 
in  many  states. 

A  third  method,  which  yields  results  sufficiently  ac- 
curate for  all  practical  purposes,  assuming  that  payments 
are  made  regularly,  is  to  calculate  the  interest,  say,  April 
I  and  October  i  of  each  year,  on  the  balances  remaining 


INTEREST  173 

unpaid  at  the  middle  of  the  half-year  (in  this  case,  on  Janu- 
ary i  and  July  i).  This  is  definite,  simple,  and  accurate, 
and  might  well  be  generally  adopted. 

In  any  event,  it  is  economical  and  convenient  to  ar- 
range for  all  interest  to  fall  due  at  fixed  periods  in  the  man- 
ner indicated,  and  it  also  tends  greatly  toward  correctness. 

§  139.    Unearned  Interest — Various  Examples 

In  order  to  compare  the  results  obtained  by  the  differ- 
ent methods  of  calculating  interest,  let  us  take  the  example 
of  a  contract  for  $5,000  dated  January  i  and  payable  in 
monthly  instalments  of  $100  each,  interest  being  charged 
each  half-year  at  the  rate  of  6%  per  annum  on  the  balances 
remaining  unpaid  from  time  to  time.  Let  us  suppose  the 
$100  is  paid  on  each  of  the  following  dates : 


January  30 
February  15 
March  15 
April  10 

May  20 
June  30 
July  30 
August  15 

September  15 
October  10 
November  20 
December  31 

If  interest  is  calculated  when  each  payment  is  made, 
the  figures  will  be  as  follows : 

Jan.      I     Principal $5,000.00 

June  30     Deduct  six  payments 600.00 


$4,400.00 

Add  interest  on  $5,000 $150.00 

Less  interest  on  $100  for: 

5  mos.     o  days   (Jan.    30  to  June  30) 

4      "      15       "        Feb.    15    "        "      " 

3      "      15       "        Mar.  15    " 

2      "     20      "        Apr.    10   "        " 

I       "      10      "        May  20    "       "      " 


17  mos 8.50          141.50 

$4,541.50 
Dec.  31     Deduct  six  payments 600.00 

$3,941.50 


174  REAL   ESTATE  ACCOUNTS 

Add  interest: 

For  six  months  on  $4,541.50  at  6%.. .     $136.24 

Less  interest  on  payments  as  above.  8.50          127.74 

Balance  at  end  of  year $3,813.76 

If  the  interest  is  calculated  on  the  balances  remaining 
unpaid  at  the  end  of  each  half-year,  the  result  will  be: 

Jan.      I     Principal   due $5,000.00 

June  30     Deduct  six  payments 600.00 


$4,400.00 
Add  interest  for  six  months  on  $4,400  at  6%....          132.00 


$4,532.00 
Dec.  31     Deduct  six  payments 600.00 


$3,932.00 
Add  interest  for  six  months  on  $3,932  at  6%...          117.96 

Balance  at  end  of  the  year $4,049.96 


If  no  payments  are  made,  the  figures  would  be: 

Jan.      I     Principal $5,000.00 

June  30     Interest   for  six  months 150.00 


$5,150.00 
Dec.  31     Interest  for  six  months 154-5° 


Balance  at  end  of  the  year $5,304.50 


Here  the  interest  is  compounded,  which,  under  the  laws 
of  some  states,  is  illegal.  In  such  cases,  the  proper  calcu- 
lation, figuring  simple  interest,  would  be  as  follows: 

Jan.      I     Principal $5,000.00 

June  30     Interest  for  six  mpnths 150.00 

Dec.  31     Interest  for  six  months 150.00 


Balance  at  end  of  the  year $5,300.00 


INTEREST 


175 


If  interest  is  charged  on  the  "average  balances,"  the 
figures  would  be  as  follows : 

Jan.      I     Principal $5,000.00 

June  30     Deduct  six  payments 600.00 


$4,400.00 
Add  interest  on  balance  of  March  31,  viz.:  $4,700          141.00 


$4,541.00 
Dec.  31     Deduct  six  payments 600.00 


$3,041.00 
Add  interest  on  balance  of  September  30,  viz.: 

$4,241 127-23 


Balance  at  end  of  the  year $4,068.23 


It  must  be  remembered  that,  in  all  the  examples,  the 
differences  will  rapidly  increase  as  time  progresses. 

§  140.    Unearned  Interest — Phraseology  of  Interest  Clause 

It  is  most  important  to  express  definitely  and  clearly 
the  method  of  calculating  interest  on  unpaid  balances,  but 
many  forms  of  contract  are  ambiguous  in  this  respect.  For 
instance,  they  usually  contain  a  clause  similar  to  the  follow- 
ing: "with  interest  at  the  rate  of per  cent  per  annum 

on  the  unpaid  portion  of  said  purchase  money."  It  is  also 
common  to  specify  whether  this  interest  shall  be  calculated 
quarterly,  half-yearly,  or  on  certain  specified  dates. 

The  uncertainty  is  due  to  the  use  of  the  expression 
"unpaid  portion  of  said  purchase  money,"  the  exact  in- 
terpretation of  which  probably  depends  upon  the  laws  of 
the  locality  in  which  the  contract  is  executed.  In  many 
states  it  will  be  interpreted  to  mean  that,  estimating  on  half- 
yearly  periods,  a  calculation  must  be  made  at  the  time  of 
each  payment.  In  other  words,  when  the  purchaser  makes 


a  payment,  the  vendor  must  calculate  the  interest  to  that 
date,  add  this  to  the  existing  principal,  and  credit  the  pay- 
ment made. 

It  is  believed  that  under  most  of  the  existing  laws  the 
ambiguity  of  contracts  in  regard  to  interest  could  be  re- 
moved by  the  following  phrasing:  "Interest  shall  be  cal- 
culated half-yearly  on  the  first  day  of and  the  first 

day  of upon  the  balances  remaining  unpaid,"  or  "In- 
terest shall  be  payable  half-yearly  on  the  first  day  of 

and  the  first  day  of and  on  being  so  calculated  shall 

be  added  to  the  principal."  The  exact  wording  of  this 
modifying  phrase  must  be  left  to  the  attorney  of  the  con- 
cern, for  it  will  depend  not  only  upon  the  wishes  of  the 
vendor,  but  also  upon  the  laws  under  which  he  is  living. 

§  141.    Unearned  Interest — Journal  Entries 

The  form  of  mortgage  under  discussion  necessitates  a 
form  of  journal  entry  that  will  meet  special  conditions,  in- 
asmuch as  it  should  show  the  principal  and  all  the  interest, 
both  being  included  in  the  amount  of  the  mortgage.  This 
interest,  however,  is  not  yet  earned,  and  will  not  be  earned 
in  full  until  the  final  payment  is  made  on  the  mortgage. 
Under  these  circumstances  it  is  plainly  improper  to  carry 
this  interest  into  Mortgage  Receivable  Interest  account, 
which  is  periodically  closed  out  into  Profit  and  Loss  ac- 
count. It  must  be  carried  separately  in  an  account  which 
may  be  called  Unearned  Interest  account. 

For  example,  a  purchaser  buys  from  a  vendor  for  $1,000 
a  piece  of  property  which  is  to  be  paid  for  in  120  monthly 
payments,  interest  being  at  6%  per  annum,  calculated  half- 
yearly.  As  was  shown  in  §  137,  the  amount  of  each  of 
these  notes  should  be  $11.23,  an<^  tne  I2°  notes  would  ag- 
gregate $1,347.60.  Omitting  all  entries  regarding  profit 
on  the  transaction  (which  have  already  been  described  in 


INTEREST  177 

Chapter  XIII),  the  journal  entry  would  have  the  following 
form: 

Mortgages  Receivable $1,347.60 

To  Property  Account $1,000.00 

"    Unearned  Interest 347-6o 

§  142.    Interest  Accrued  Not  Due 

When  preparing  a  balance  sheet  and  other  accompany- 
ing statements,  it  is  frequently  proper  to  show  thereon 
items  for  interest  accrued  but  not  due,  in  order  to  arrive  at 
the  actual  condition  of  the  business  on  the  date  of  the  bal- 
ance sheet.  This  accrued  interest  is  the  amount  which  has 
accrued  on  each  item  since  the  last  entry  of  overdue  in- 
terest. 

While  the  amount  should  be  calculated  accurately,  and 
not  merely  estimated,  it  is  not  always  advisable  to  enter 
it  on  the  books,  as  any  such  entry  may  lead  to  complica- 
tions in  the  following  year,  for  the  reason  that  the  numer- 
ous items  of  accrued  interest  fall  due  at  different  periods 
and  it  is  necessary  to  determine  each  month  (for  possibly 
the  eleven  months  following  the  balance  sheet)  the  amount 
which  has  become  due,  and  this  amount  is  to  be  credited  to 
interest  accrued  instead  of  to  interest  overdue. 

This  is  one  reason  why  many  real  estate  concerns  have 
found  it  best  not  to  take  into  the  balance  sheet  interest  ac- 
crued but  not  due.  The  consequent  inaccuracies  are  re- 
duced in  amount  if  interest  is  made  payable  quarterly,  and 
also  if  the  last  day  of  the  fiscal  year  be  selected  as  one  of 
the  regular  dates  for  calculating  interest,  as  suggested 
in  §  138. 


CHAPTER    XX 
EARNED    PROFITS    AND    BOOK    PROFITS 

§  143.    Book  Profits 

So  far,  the  consideration  of  profits  from  sale  of  real 
property  has  been  confined  to  the  methods  of  bringing  them 
on  the  books  of  account.  The  present  chapter  will  consider 
how  much  of  these  "book  profits"  has  been  actually  earned 
and  therefore  may  be  distributed  to  the  stockholders  as  divi- 
dends. It  is  proposed  to  discuss  this  question  in  detail,  but 
only  so  far  as  it  relates  to  gross  profits,  that  is,  to  the 
difference  between  the  cost  of  the  property  and  its  selling 
price. 

If  the  methods  described  in  the  preceding  chapters  have 
been  followed,  the  profits  will  appear  in  the  general  ledger 
in  one  or  more  accounts,  each  of  which  is  distinguished  by 
the  word  "Gain"  appearing  in  the  name  of  the  account,  as 
"Gain  on  Sales,"  "Hillbrook  Gains,"  etc.  The  profits  re- 
main in  these  accounts  until  it  is  desired  to  close  the  accounts 
and  ascertain  the  profits  for  any  given  period.  The  only 
exception  to  this  rule  is  in  the  case  of  cash  sales,  where  the 
gains  are  carried  directly  to  "Profits"  (§  82),  and  of  those 
time  sales  which  have  been  cancelled  and  the  gains  carried 
to  "Cancellation  Profits"  (§  153). 

§  144.    Gains  Distinguished  from  Earned  Profits 

The  distinction  between  gains  and  earned  profit  can  be 
made  clearer  by  the  use  of  a  concrete  example,  which  will 
also  afford  a  comparison  of  the  various  methods  of  dealing 
with  profits.  Assume  that  a  corporation  has  acquired  a 

178 


EARNED  PROFITS  AND  BOOK  PROFITS 


179 


tract  of  land  at  a  total  cost  of  $60,000,  and  that  by  means 
of  advertising,  exploiting,  development,  and  a  general  en- 
hancement of  values,  it  has  been  able  to  sell  this  tract  for 
$180,000,  thus  gaining  $120,000.  If  the  sale  were  made 
for  cash,  the  following  entries  would  appear  on  the  debit 
side  of  the  cash  book' 

Real  Estate ; $6o,oco 

Profits 120,000 

At  the  closing  of  the  books,  the  Profits  account  is 
credited  directly  to  the  Profit  and  Loss  account,  the  balance 
of  which  account  may  then  be  available  for  the  payment 
of  dividends. 

Suppose  that  the  transaction  is  a  time  sale,  that  a 
nominal  cash  consideration  is  inserted  in  the  deed  of  con- 
veyance, and  that  payment  is  to  be  made  in  five  instalments 
as  follows: 

No.  Amount 

1  $24,000 

2  30,000 

3  36,000 

4  42,000 

5  48,000 


$180,000 

Any  considerations  regarding  interest  are  omitted  here, 
as  this  subject  has  been  treated  in  Chapter  XIX. 

It  is  obviously  improper  to  carry  to  the  Profit  and  Loss 
account  the  entire  profit  of  $"120,000  when  the  first  instal- 
ment is  paid,  as  only  24/180  of  the  entire  price  has  been 
paid  in.  If  this  were  done,  the  entire  profit  of  $120,000 
might  be  paid  out  in  dividends  or  be  declared  payable  as 
such,  while,  as  a  matter  of  fact,  the  other  four  instalments 
might  not  be  paid  at  all  and  the  vendor  be  obliged  to  take 


REAL    ESTATE   ACCOUNTS 

back  the  property.     In  such  case — which  is  not  unknown — 
the  transaction  would  stalJfc  on  the  books  as  follows : 

Original  cost $60,000 

Dividends  declared 120,000     $180,000 


Less  first  instalment 24,000 


Balance  remaining  unpaid $156,000 

If  the  sale  was  not  carried  out,  the  unearned  profit,  hav- 
ing been  used  for  the  payment  of  dividends,  must  be  written 
off  to  something.  The  only  practicable  disposition  is  to 
charge  it  to  the  cost  of  property,  or  to  charge  it  back  to 
Profit  and  Loss  in  the  next  statement.  The  latter  is  the 
better  plan,  as  the  former  would  involve  the  inflation  of 
Real  Estate  account  by  $96,000. 

It  may  be  argued  that  the  purchaser  could  be  forced  to 
make  good  any  losses  incurred  through  his  failure  to  com- 
plete his  purchase.  This  may  or  may  not  be  true,  depend- 
ing, first,  upon  the  nature  of  the  agreement  under  which 
the  sale  was  made,  and  second,  upon  the  ability  of  the  pur- 
chaser to  pay.  If  the  property  were  sold  on  some  form  of 
contract,  there  might  be  no  obligation  on  the  part  of  the 
purchaser  to  pay  the  entire  price.  If  the  unpaid  portion 
of  the  price  were  secured  by  mortgage,  recourse  to  the 
courts  might  result  in  a  judgment  the  value  of  which  would 
depend  entirely  upon  the  resources  of  the  mortgagor.  But 
aside  from  such  contingencies,  it  must  be  noted  that  in 
dealing  with  real  estate  securities  the  common  practice,  and 
the  safe  and  proper  one,  is  to  depend  on  the  value  of  the 
physical  security  and  not  upon  the  financial  standing  of  a 
mortgagor.  Therein  lies  the  safety  of  such  securities,  and 
therein  is  also  found  the  favor  with  which  mortgages  are 
regarded  by  conservative  investors.  When  a  real  estate 


EARNED   PROFITS   AND    BOOK   PROFITS  igl 

corporation  departs  from  this  principle  in  its  transactions, 
it  justly  forfeits  the  confidence  of  the  public. 

§  145.    Rule  for  Calculating  Earned  Profits 

Admitting  that  all  the  profit  is  not  earned  until  all  the 
payments  are  made,  it  follows  that  the  profits  are  earned  in 
proportion  as  the  payments  are  made.  In  other  words,  the 
earned  profit  bears  the  same  ratio  to  the  total  book  profit  as 
the  payments  made  bear  to  the  total  selling  price. 

In  our  example,  therefore,  the  profits  would  be  earned 
as  follows: 


Corresponding 

No. 

Instalments 

Earned  Profits 

i 

$24,000 

$16,000 

2 

30,000 

20,000 

3 

36,000 

24,000 

4 

42,000 

28,000 

5 

48,000 

32,000 

$180,000  $120,000 

The    rule   for   calculating   the   earned   profits   may   be 
formulated  in  the  following  manner: 

Payments  made 

X  total  gain  =  earned  profits 


Total  selling  price 

It  is  evident  that  the  total  profits  divided  by  the  total 
selling  price  gives  the  ratio  of  profit  to  be  deducted  from 
each  instalment  payment  as  actually  earned  profit;  e.g., 
when  the  above  transaction  is  completed,  the  total  profit 
thereon  is  $120,000,  which,  divided  by  the  total  selling 
price,  $180,000,  shows  the  ratio  of  profit  to  be  663/3%. 
Therefore,  on  the  first  payment  of  $24,000,  the  earned  or 
realized  profit  would  be  662/$%  of  this  sum,  or  $16,000. 

It  may  be  argued  that  the  course  indicated  is  too  con- 


REAL    ESTATE   ACCOUNTS 

servative,  and  that,  when  a  considerable  portion  of  the  price 
has  been  paid,  say  one-half,  it  is  safe  to  assume  that  all 
profits  accruing  from  the  transaction  are  already  earned — 
on  the  ground  that  the  security  is  worth  double  the  amount 
of  the  unpaid  purchase  money.  In  the  case  of  a  sale  under 
contract,  this  assumption  is  not  justified,  on  account  of  the 
absence  of  any  obligation  on  the  part  of  the  purchaser  to 
pay  the  full  amount.  In  the  case  of  a  mortgage,  it  is  ad- 
mitted that,  in  certain  instances,  it  may  be  safe  so  to  regard 
the  matter;  for  instance,  in  the  case  of  a  dwelling,  office 
building,  or  other  property  available  for  a  large  variety  of 
purchasers  or  users,  on  which  half  of  a  reasonable  purchase 
price  has  been  paid.  Such  conditions,  however,  are  fre- 
quently absent  from  large  transactions,  where  the  actual 
considerations  may  be  based  on  possible  profits  to  be  derived 
by  a  purchaser,  as  in  the  case  of  a  development  company ;  or 
where  the  transaction  is  of  such  magnitude,  or  the  property 
concerned  of  such  a  nature,  that  the  number  of  possible 
purchasers  or  users  is  materially  restricted. 

§  146.    Anticipation  of  Earned  Profits 

In  order  to  show  the  possible  dangers  arising  from  re- 
garding as  earned  all  the  profits  resulting  from  a  sale  when 
only  a  part  (say  one-half)  of  the  selling  price  has  actually 
been  paid  in,  the  example  already  given  may  be  taken.  In 
this,  on  the  completion  of  the  third  payment  one-half  of  the 
price  has  been  paid.  If  no  further  payments  should  be  made, 
there  would  remain  unpaid  $90,000,  of  which  $60,000  would 
be  unearned  profits.  These  profits,  it  is  assumed,  have  been 
anticipated  and,  together  with  the  $60,000  actually  earned, 
have  been  carried  to  the  Profit  and  Loss  account.  The 
transaction  being  cancelled,  it  is  necessary  to  write  off  the 
unpaid  balance,  which  will  ordinarily  be  to  the  Real  Estate 
account,  as  already  suggested ;  and  the  property  which  was 


EARNED   PROFITS   AND   BOOK  PROFITS  183 

purchased  originally  for  $60,000  now  stands  on  the  books 
at  a  valuation  of  $90,000.  If  this  operation  were  repeated 
several  times,  it  becomes  evident  that  the  book  value  of  the 
property  would  equal  or  exceed  the  selling  price  of  $180,000. 
Further,  if  such  a  course  were  followed,  it  is  obvious  that, 
through  a  series  of  dummy  sales,  a  fraudulent  management 
could  inflate  to  any  amount  the  book  valuation  of  the  real 
estate  holdings. 

Other  reasons,  also,  commend  the  practice  of  making 
earned  profit  dependent  upon,  and  in  proportion  to,  the 
part  of  the  selling  price  actually  paid  in.  It  is  not  so  much 
the  duty  of  directors  to  pay  out  as  dividends  every  cent  as 
soon  as  it  is  apparently  earned,  as  it  is  to  safeguard  the 
credit  and  stability  of  the  company  which  they  serve ;  .and 
this  is  most  effectively  accomplished  by  creating  a  reserve 
for  the  protection  of  the  future ;  this  reserve  will  also  serve 
to  maintain  the  market  value  of  the  capital  stock.  Prudent 
management,  a  strong  reserve,  and  a  conservative  method 
of  handling  profits  go  much  further  toward  winning  and 
retaining  public  confidence  than  the  occasional  payment  of 
large  dividends. 

Moreover,  as  has  been  seen  in  the  case  of  time  sales 
under  contracts,  it  is  manifestly  improper  to  consider  all  the 
profits  as  earned  before  the  transaction  is  closed.  It  is  very 
desirable  to  treat  uniformly  as  to  profits,  accounts  which 
are  so  similar  as  the  two  classes  of  time  sales  known  as 
"mortgages"  and  "contracts." 

§  147.    Equity  as  a  Basis  for  the  Calculation  of  Profits 

The  following  case  occurred  in  actual  practice,  and  is 
given  here  because  it  illustrates  an  apparent  divergence  from 
the  rules  suggested. 

John  Doe  owned  a  house  which  cost  him  $8,000,  and  on 
which  there  was  a  mortgage  of  $4,500,  thus  leaving  him 


1 84 


REAL    ESTATE   ACCOUNTS 


an  equity  of  $3,500.  He  sold  the  house  to  Richard  Roe  for 
$9,000,  of  which  $3,000  was  payable  in  cash.  The  existing 
first  mortgage  of  $4,500  was  assumed,  and  a  second  mort- 
gage for  $1,500,  payable  in  one  year,  was  accepted  by  Doe. 
In  this  case,  it  is  not  the  total  price  of  $9,000  which 
would  form  a  basis  for  calculation,  but  rather  the  price 
obtained  for  the  equity  of  John  Doe,  viz.,  $4,500.  Of  this 
equity,  $3,000  being  paid  in  cash,  two-thirds  of  the  profit  of 
$1,000  would  be  realized  immediately,  and  the  remaining 
one-third  would  be  realized  upon  the  payment  of  the  second 
mortgage  of  $1,500. 


CHAPTER    XXI 

CANCELLATIONS    OF    TIME    SALES 

§  148.    Time  Sales  and  Cancellations 

In  every  business  where  payments  are  made  on  an  instal 
ment  plan,  it  is  inevitable  that  there  should  be  a  certain 
number  of  lapses ;  and  the  real  estate  business  is  no  exception 
to  this  rule.  If  such  a  business  is  properly  conducted  and 
the  accounts  carefully  watched,  these  lapses  should  result  in 
profits  to  the  concern,  although  these  profits  will  evidently 
be  less  than  if  the  sales  had  been  completed.  Indirect  or 
subsequent  profits  arising  out  of  the  resale  of  the  property 
involved  are,  of  course,  treated  as  new  business.  In  other 
words,  each  cancellation  profit  leads  to  an  immediate  reduc- 
tion of  the  "Gain  on  Sales"  (the  reserve  profits),  and  to  an 
immediate  but  smaller  addition  to  the  earned  profits. 

§  149.    Amount  of  First  Payment 

The  amount  of  the  first  payment,  except  in  special  cases, 
such  as  unimproved,  suburban,  and  subdivision  properties, 
should  usually  be  a  fixed  percentage  of  the  purchase  price, 
and  sufficient  to  cover  several  monthly  instalments.  No 
uniform  rule  as  to  its  amount  can  be  laid  down,  but  several 
large  concerns  doing  business  in  the  Southern  States  require 
10%  of  the  purchase  price  to  be  paid  in  before  contracts 
will  be  executed.  The  rule  is  based  on  the  belief  that,  if  a 
purchaser  cannot  now,  or  in  the  immediate  future,  pay  this 
10%,  he  probably  will  be  unable  to  meet  regularly  the  future 
payments.  The  system  has  yielded  excellent  results,  and  has 
led  to  the  use  of  options,  such  as  shown  in  §  130,  which 

185 


REAL    ESTATE   ACCOUNTS 

are  available  when  a  desirable  purchaser  requires  a  little 
time  in  which  to  make  the  first  payment. 

§  150.    Payments  in  Arrears 

It  is  even  more  difficult  to  give  any  general  rule  regu- 
lating the  amount  of  time  to  be  allowed  delinquents.  No 
banker  would  arbitrarily  decide  that  all  his  loans  and  dis- 
counts should  receive  90  days'  extension  and  no  more.  Ill- 
ness or  loss  of  work  may  cause  a  good  customer  to  fall  in 
arrears  for  a  time;  or  a  purchaser  may  spend  money  in 
improvements  on  the  property,  which  would  otherwise  have 
been  applied  on  the  periodic  instalments.  Each  case  must 
be  carefully  considered  on  its  merits,  for  in  deciding  such 
questions,  not  only  the  value  of  any  particular  piece  of 
property  must  be  considered,  but  also  the  reputation  of  the 
purchaser. 

On  the  one  hand,  arrears  should  not  be  allowed  to 
accumulate  to  such  an  extent  that  a  surrender  of  the  prop- 
erty would  result  in  loss;  on  the  other  hand,  it  is  unwise 
for  a  concern  to  avail  itself  of  every  technicality  in  order  to 
foreclose  at  the  earliest  date  legally  possible,  for  such  a 
reputation  is  thereby  earned  as  will  tend  to  drive  away 
prospective  customers. 

To  a  concern  selling  on  the  instalment  plan,  a  reputation 
for  generous  dealing  is  a  valuable  asset.  It  should  be  re- 
membered that,  even  if  arrears  are  allowed  to  run  for  a 
time  after  a  considerable  number  of  payments  have  been 
made,  interest  also  is  usually  running,  and  though  there  wrill 
be  a  reduction  in  present  cash  receipts,  the  final  profits  will 
in  no  way  suffer. 

In  cases  where  arrears  have  accrued  and  doubt  exists  as 
to  the  final  disposition  of  the  contract,  it  is  good  policy  to 
omit  the  calculation  of  interest  while  this  condition  con- 
tinues. This  avoids  the  creation  of  a  possibly  fictitious  asset, 


CANCELLATIONS   OF  TIME   SALES  187 

for  when  interest  is  included  in  these  contract  accounts,  it 
becomes  technically  an  asset  and  increases  the  amount  of 
"Contracts"  on  the  balance  sheet.  Should  normal  payments 
be  resumed,  it  is  a  simple  matter  to  add  all  interest  so 
omitted. 

§  151.    Accounting  Treatment  of  Cancellations 

Let  us  assume  that  it  is  desired  to  cancel  a  contract,  the 
original  amount  of  which  was  $3,600,  $900  being  profit  and 
the  payments  amounting  in  all  to  $400;  i.e.,  the  original 
amount  of  $3,600  has  been  reduced  by  $400  after  debiting 
interest  and  all  charges.  For  the  sake  of  simplicity,  this 
reduction  in  balance  is  regarded  as  the  amount  paid  in,  as 
in  practice,  of  course,  it  is  only  the  reduction  on  the  debt 
which  affects  the  profits  earned. 

The  original  profit  would  be  credited  to  Gain  on  Sales 
account,  and  reference  to  the  annual  analytical  sheets  of 
that  account  (§  269),  or  to  the  sub-ledger  if  similar  to  that 
of  Form  15  (§  23),  will  show  that  at  the  closing  of  the 
books  $80  of  profit  had  been  earned  and  $820  remained 
in  the  Gain  account.  Three  figures  have  then  been  deter- 
mined, viz. : 

1.  Cost  of  the  property,  $3,600  —  $900  =  $2,700. 

2.  Balance  remaining  in  Gain  account,  $900  —  $80  = 

$820. 

3.  Balance  due  on  the  contract,  $3,200. 

And  there  is  still  to  be  determined — 

4.  Cancellation  profits. 

It  is  required  to  debit  Real  Estate  with  the  property  re- 
acquired,  and  Gain  on  Sales  with  the  amount  remaining 
therein;  and  to  credit  Contracts  with  the  balance  to  be 
extinguished,  and  Cancellation  Profits  with  the  earned  profit 
not  yet  written  off  to  Profit  and  Loss  account. 


REAL    ESTATE   ACCOUNTS 

Since  the  debits  are  $3,520  ($2,700  -+-  $820),  and  the 
credit  is  $3,200,  the  remaining  credit  must  be  $320.  The 
journal  entry,  therefore,  is  as  follows: 

Property  Account $2,700 

Gain  en  Sales 820 

To   Contracts $3,200 

"    Cancellation    Profits 320 

To  cancel  contract  No 

By  means  of  these  entries,  the  Gain  on  Sales  account  is 
kept  "clean"  and  all  amounts  relating  to  this  transaction  are 
eliminated.  This  is  a  matter  of  importance,  especially  in  the 
case  of  subdivision  contracts.  (See  §  181.) 

§  152.    Erroneous  Cancellation  Entries 

This  matter  is  discussed  in  some  detail  for  the  reason 
that  many  bookkeepers  make  incorrect  entries  when  closing 
out  contract  accounts,  usually  reasoning  as  follows: 

The  contract  balance  is  $3,200,  the  property  is  worth 
$2,700,  and  the  original  gain  was  $900 ;  therefore  the  entry 
is  the  following: 

Real   Estate $2,700 

Gain  on  Sales 900 

To   Contracts $3,200 

"    Profits 400 

The  fact  that  a  part  of  this  profit  has  already  been  carried 
to  Profit  and  Loss  is  overlooked. 

Another  erroneous  form  is  as  follows: 

Real  Estate $2,700 

Gain  on  Sales   (Originally       $900) 

(Cash  paid  in    400) 500 

To  Contracts $3,200 


CANCELLATIONS   OF  TIME   SALES 


I89 


In  each  of  these  cases,  it  will  be  seen  that  an  amount  is 
left  in  Gain  on  Sales  account  which  is  unaccounted  for;  in 
the  first  instance,  $80,  and  in  the  second,  $320  (i.e.,  $900  — 
$80  —  $500). 

§  153.    Cancellation  Profits  Account 

It  will  be  seen  that  the  correct  entry  calls  for  a  new 
account,  "Cancellation  Profits,"  which  is  intended  to  re- 
ceive the  forfeited  profits  from  all  classes  of  time  sales  which 
may  be  cancelled  during  the  year.  It  is  extremely  useful  to 
have  such  an  account,  showing  at  a  glance  all  cancellations, 
for  the  total  of  these  should  always  be  found  at  each  closing 
of  the  books  and  be  included  in  a  schedule,  in  order  that  the 
management  may  have  accurate  information  as  to  the  ratio 
of  such  cancellations  to  the  gross  sales.  In  entering  items 
to  this  account  in  the  ledger,  it  is  convenient  to  make 
additional  memorandum  entries  showing  the  total  amount 
of  the  sales  affected  by  the  cancellation  profits,  in  some  such 
way  as  the  following: 

CANCELLATION  PROFITS 

(Credit  side  of  ledger  account) 


Total 
Cancelled 

Profits 

Monthly 
Totals 

1917 

Jan.  10 

Contracts   (general)  

$4  200.00 

$80000 

20 

Kingslake  

2,200.00 

7=^0.00 

Si.S'iO.oo 

Feb.  20 

Ladore  ., 

1.  200.00 

240.00 

From  the  above  figures,  it  is  easy  at  any  time  to  make 
an  analysis  showing  the  various  classes  of  sales  which  have 
been  cancelled  and  the  total  amount  of  each. 

The  principles  here  laid  down  for  the  treatment  of  con- 
tracts apply  equally  to  mortgages.  Care  should  be  taken 


190 


REAL   ESTATE  ACCOUNTS 


to  consider  the  reduction  of  the  principal  debt;  and  any 
charges  standing  in  the  Income  account  should  be  balanced 
by  charging  them  to  the  appropriate  nominal  account,  viz., 
Mortgage  Interest  Receivable,  Taxes,  Insurance,  etc. 

The  above  remarks  apply  to  general  contracts,  the  details 
of  subdivision  properties  being  considered  in  the  next 
chapter.  For  the  sake  of  convenience,  however,  the  can- 
cellation of  subdivision  time  sales  is  discussed  here. 

§  154.    Cancellation  of  Subdivision  Sales 

In  the  case  of  subdivision  sales,  the  same  principles  apply, 
but  the  data  is  secured  in  a  different  manner. 

Take  for  example  a  lot  in  Eureka  Gardens  subdivision 
sold  for  $240,  yielding  a  profit  of  $120.  Assume  that  $30 
was  paid  in  cash,  of  which  $15  was  carried  to  Profit  at  the 
last  closing  of  the  books.  It  is  now  desired  to  cancel  this 
contract,  and  the  journal  entry  will  consist  of  four  items, 
viz.: 

Eureka  Gardens  Purchase $120 

Eureka  Gardens  Gains 105 

To  Eureka  Gardens  Contracts $210 

"    Cancellation   Profits 15 

In  explanation  of  this  entry,  it  may  be  said  that  the 
cost  of  a  Eureka  Gardens  lot  and  the  balance  of  the  contract 
are  fixed  amounts,  viz.,  $120  and  $210  respectively.  The 
subdivision  ledger  shows  that  $15  has  been  carried  to  Profit 
and  Loss  account,  leaving  $15  for  Cancellation  Profits.  The 
total  of  the  fixed  credit  entries  is  therefore  $225,  and  the 
remaining  debit  entry  must  therefore  be  $105. 

The  same  result  may  be  approximately  arrived  at  by 
ascertaining  the  ratio  between  the  collections  and  the  selling 
price  at  the  time  the  books  were  last  closed,  and  assuming 
that  the  corresponding  percentage  of  total  credits  up  to 


CANCELLATIONS   OF  TIME  SALES  191 

the  end  of  the  last  fiscal  period  has  already  been  carried  into 
Profit  and  Loss.  If  this  amount  is  deducted  from  the  same 
percentage  of  the  total  cash  received,  the  difference  will  be 
the  amount  now  to  be  carried  to  Cancellation  Profits. 

It  is,  of  course,  evident  that,  if  we  were  to  carry  to  Can- 
cellation Profits  the  entire  amount  paid  in,  we  should  be 
carrying  far  too  much  and  be  anticipating  profits,  as  would 
appear  from  the  final  payments  when  the  whole  subdivision 
was  sold  out  and  paid  for. 


CHAPTER    XXII 

SUBDIVISION,  DEVELOPMENT,  AND  SUBURBAN 
PROPERTIES 

§  155.    Acquirement 

While  subdivision  properties  may  be  acquired  in  the 
usual  manner  by  a  deed  of  conveyance  paid  for  by  cash  or 
by  a  mortgage  payable,  the  method  employed  sometimes  is 
quite  different.  The  concern  selling  on  contract  may  itself 
be  buying  under  a  contract,  or  it  may  have  merely  a  selling 
contract,  the  title  remaining  in  the  owner  and  the  concern 
acting  as  an  agent.  Examples  of  these  methods  are  shown 
in  detail  in  §§  200,  204,  232,  and  250. 

§  156.    Release  of  Lots  from  Encumbrances 

When  the  concern  does  not  own  an  unencumbered  title, 
it  is  usual  to  make  some  definite  arrangement  under  which 
the  owner  agrees  to  convey,  or  the  mortgagee  to  release, 
such  lots  as  are  paid  for  in  full  by  the  customers  of  the 
concern.  Otherwise,  it  might  be  necessary  for  a  purchaser 
to  await  the  completion  of  the  concern's  contract,  or  the 
payment  in  full  of  its  mortgages,  before  he  could  receive  an 
unencumbered  title. 

The  terms  under  which  such  deeds  to  lots  are  issued  vary 
greatly.  Sometimes  the  deed  is  given  only  when  the  pro- 
portion of  the  purchase  price  applicable  to  that  lot  is  paid 
to  the  owner  in  full,  such  amounts  being,  of  course,  credited 
to  the  concern  and  deducted  from  the  total  amount  to  be 
paid  by  it  for  the  entire  tract.  Sometimes  the  owner  or  the 
mortgagee  agrees  to  convey  or  release  a  part  of  the  land 

192 


SUBDIVISION   PROPERTIES 


193 


proportionate  to  the  payments  made.  In  the  case  of  selling 
contracts,  the  owner  usually  requires  that  he  shall  receive 
the  full  price  for  any  specific  lot  he  is  required  to  deed  during 
the  active  life  of  the  contract.  Whatever  the  terms  and  con- 
ditions may  be,  it  is  important  that  the  accountant  inform 
himself  of  them  from  the  original  agreement  or  from  a 
complete  copy  thereof,  in  order  to  open  appropriate  accounts 
and  make  all  proper  entries. 

§  157.    Cost  Price  of  Property 

Other  points  of  importance  are  the  ascertainment  of  the 
cost  price  and  the  making  of  some  definite  provision  for 
changes  in  this  cost.  The  cost  price  of  the  land  should 
include  the  purchase  price,  legal  expenses  of  acquirement, 
and  interest. 

In  regard  to  interest,  it  is  logical  and  permissible  to 
compute  this  item  from  the  time  of  acquirement  up  to  the 
time  the  land  is  put  on  the  market*  Such  a  charge  is 
similar  to  that  allowed  by  law  where  a  company  is  con- 
structing a  railroad,  and  in  other  similar  cases ;  for  the  con- 
cern is  frequently  required  to  make  many  improvements 
to  the  property  before  it  can  be  turned  over  to  the  sales 
department. 

The  cost  price  of  the  land  should  also  include  the  cost  of 
surveying,  platting,  etc.,  the  cost  of  clearing,  and  the  cost 
of  roads,  fences,  ditches,  etc. 

§  158.    Cost  Per  Lot 

If  these  improvements  are  completed  at  the  time  the 
sales  begin,  the  face  of  the  books  will  show  the  total  cost, 
and  this  can  be  apportioned  to  each  lot.  Where  lots  are 
fairly  uniform,  this  may  be  done  by  dividing  the  total 
amount  by  the  total  number  of  lots,  and  making  minor 

*See  Chapter  XI  for  discussion  of  interest  as  part  of  cost. 


194 


REAL    ESTATE  ACCOUNTS 


adjustments  for  lots  of  irregular  size.  If  the  lots  are 
irregular  throughout,  the  cost  should  be  apportioned 
according  to  area. 

In  fixing  the  cost  per  lot,  there  is  sometimes  a  tendency 
to  charge  those  lots  likely  to  bring  the  highest  prices  with 
the  highest  cost.  This  is  not  good  practice ;  for  the  reasons 
given  above,  the  cost  of  any  lot  should  be  determined  solely 
by  its  area,  except  where  special  expenditures  have  been 
made  for  improvement  purposes. 

§  159.    Cost  Price  When  Improvements  Are  Incomplete 

Unfortunately  for  the  accountant,  it  is  often  decided  to 
place  lots  on  the  market  before  all  the  contemplated  improve- 
ments have  been  completed.  In  such  cases  the  books  will 
show  a  certain  cost  price  when  the  sales  commence,  and  this 
book  price  will  increase  continuously  until  the  improvements 
are  completed;  in  fact,  the  cost  price  is  subject  to  monthly, 
weekly,  and  even  daily  changes. 

This  undesirable  situation  may  be  avoided  by  estimating 
in  advance  the  cost  of  all  improvements  contemplated,  and 
by  adding  to  this  a  fair  margin  of  safety.  This  amount 
should  then  be  credited  to  an  improvement  reserve  account, 
and  debited  to  the  cost  price;  charging  all  proper  expendi- 
tures, as  they  occur,  against  this  improvement  reserve.  The 
estimate  does  not  involve  or  determine  expenditures,  and 
any  excess  which  may  remain  can  properly  be  credited  to 
Gain  account,  for  this  account  would  have  been  propor- 
tionately greater  had  these  improvements  not  been  added  to 
the  cost. 

§  160.    "Constant  Cost  Price" 

If  the  above  plan  is  followed,  a  fixed  cost  price  is  obtain- 
able, which  should  remain  in  force  until  the  books  are  closed, 
when  it  can  be  verified  or  changed  if  necessary.  The 


SUBDIVISION   PROPERTIES  195 

realized  profits  depend  on  this  price;  and,  especially  if  the 
profits  are  determined  by  averaging  all  outstanding  con- 
tracts, it  is  very  advantageous  to  have  as  few  changes  as 
possible  in  the  conditions. 

for  Subdivision  properties  is  a  comparatively. 


recent  necessity,  and  few  text-books  even  touch  on  it.  It 
has  been  suggested  r.oqgntly  by  one  eminent  authority  that 
the  cost  price  should  be  recalculated  each  month;  but  it  is 
believed  that  the  plan  here  suggested  is  more  scientific  and 
more  convenient.  It  would  add  a  considerable  burden  to 
the  bookkeeper  of  a  concern  handling  constantly  between 
twenty  and  thirty  different  subdivisions,  if  he  had  to  calcu- 
late costs  afresh  each  month.  In  practice  it  is  found  best 
to  keep  the  cost  price  constant  until  the  end  of  the  fiscal 
period.  At  that  time  the  improvement  reserve  account  may 
be  either  increased  or  wiped  out,  according  to  the  circum- 
stances. 


§  161.    Comparison  of  Cost  Finding  Methods  \    A/y        A 

It  should  be  clearly  understood  that  the  frequent  re- 
vision of  the  cost  price  of  lots  is  not  an  inaccurate  method, 
for  the  final  results  of  the  two  methods  are  identical.  This  / 
can  best  be  shown  by  the  calculations  in  the  following  / 
simple  example: 

Suppose  that  of  twelve  lots  composing  a  small  subdivi-/ 
sion  and  each  originally  costing  $360,  one  is  sold  each  month 
during  the  year,  and  during  that  year  improvements  havje 
been  made  continuously  in  such  amounts  that  the  cost  of 
each  unsold  lot  has  increased  $10  a  month  up  to  $480  at  the 
last  sale.  In  each  case  the  selling  price  was  $600,  and  each 
contract  paid  regularly  $24  a  month  for  every  month  of /its 
existence,  no  "first  payment"  being  demanded. 

Calculated  on  the  fixed  price  plan,  the  figures  woulq  be 
as  follows: 


REAL   ESTATE   ACCOUNTS 

Total  sales,  12  lots  at  $600 $7,200 

Total  cost : 

Purchase  price,  12  lots  at  $360 $4,320 

Add  improvements  (n  X  Io)  +  (Io  X  IO)  + 

(9  X  I0)»  etc-  =  66  X  I0  = 660      4,980 


Total  gain $2,220 

Total  amount  paid  in,  78  payments  at  $24  each 1,872 

Calculated  on  varying  cost  price,  the  figures  are : 

Total  sales,  as  above $7,200 

Total  amount  paid  in,  as  above 1,872 

Gain : 

i  lot  at  $240 
I  "  "  230 
i  "  "  220 

I  "  "  210 

I  "  "  200 

I  "  "  IQO 

I  "  "  180 

I  "  "  170 

I  "  "  1 60 

I  "  "  ISO 

I  "  "  140 

I  "  "  130  2,220 


§  162.    Check  on  Unsold  Lots 

In  the  case  of  journal  entries  relating  to  the  opening  or 
cancelling  of  contracts,  a  valuable  check  on  the  unsold  lots 
may  be  obtained  by  the  following  simple  means: 

1.  Rule  a  special  column  on  each  side  of  the  general 
ledger  account,  showing  the  cost  of  the  property;  and  when 
the  opening  debit  entry  is  made,  insert  in  the  special  column 
on  the  debit  side  the  total  number  of  lots  acquired. 

2.  Use  similar  special  columns  in  the  journal  when 
making  journal  entries  affecting  sales  or  cancellations  of 


SUBDIVISION    PROPERTIES  197 

these  lots,  and  also  in  the  cash  book  when  entering  cash 
sales  which  are  not  journalized.  Post  the  total  of  each  of 
these  special  columns  to  the  proper  special  column  in  the 
general  ledger.  The  difference  between  the  totals  of  the 
two  ledger  columns  will  then  always  show  the  number  of 
lots  unsold — a  valuable  figure  which  can  be  checked  with 
the  unsold  lots  as  shown  by  the  tickler  and  plats. 

§  163.    Subdivision  Property  Expenses 

Among  the  expenses  incidental  to  the  development  of  a 
large  subdivision  propertY>/  charges  will  frequently  be  found 
for  such  items  as  "steaaJMiLt  Jar  tranopontmgliygPHliHB|ep»/> 

^«HC>etc.     In  such  cases,  it  is  proper  to  carry  the  actual 

1.  JL  •/ 

cost  of  these  items  as  assets,  writing  off  proper  amounts  for 
depreciation.  There  is  no  doubt  that  it  is  better  thus  to 
eliminate  these  items  from  the  Expense  account  and  to  carry 
them  under  separate  accounts,  the  name  of  each  of  which 
indicates  its  purpose.  The  cost  of  operating  and  maintain- 
ing such  ventures  should,  of  course,  always  be  charged  to 
the  Operating  account. 

§  164.    Advertising  Expense 

There  is  still  another  class  of  expense  which  calls  for 
special  treatment  and  which  may  be  called  "Advertising 
Expense."  It  consists  of  sums  spent  for  newspaper  and 
pamphlet  advertisements,  pictures,  circulars,  postage,  etc., 
which,  in  the  case  of  a  large  subdivision,  soon  become 
considerable. 

Such  items  may  be  properly  charged  off  directly  to  Profit 
and  Loss,  or  they  may  be  kept  in  an  account  by  themselves 
and  treated  like  the  organization  expenses  of  a  new  com- 
pany. In  the  latter  case  there  should  be  written  off  each 
year,  either  a  fixed  fraction  of  the  whole  sum,  or  an  amount 


jcjg  REAL    ESTATE    ACCOUNTS 

proportionate  to  the  sales  for  the  period.  Such  an  arrange- 
ment, honestly  carried  out,  is  proper  and  just  to  all  con- 
cerned. For  instance,  considerable  sums  in  advertising 
might  be  spent  in  the  last  part  of  a  fiscal  period,  while  no 
sales  might  be  reported  until  the  following  period,  and  if 
the  whole  expense  (from  which  no  benefit  has  yet  accrued) 
is  charged  off,  it  might  unnecessarily,  or  even  unfairly, 
impair  the  dividend.  At  the  same  time,  all  such  accounts 
should  receive  a  careful  scrutiny  and  should  never  be 
allowed  to  run  beyond  their  allotted  term. 

Expenditures  for  current  advertising  and  selling  of  any 
subdivision  may  properly  be  kept  by  themselves,  and  at  the 
end  of  a  fixed  period  be  carried  direct  to  Profit  and  Loss. 


§  165.    Advances  to  Settlers 

Arrangements  are  sometimes  made,  in  connection  with 
subdivision  properties,  to  advance  to  the  settlers  actually  on 
the  ground  the  cost  of  certain  improvements.  In  one  par- 
ticular case  in  the  writer's  experience,  the  owners  had  made 
numerous  sales  through  an  agent  who,  it  subsequently  trans- 
pired, had  been  guilty  of  false  representations.  He  had, 
in  this  way,  induced  a  number  of  settlers  to  come  to  the 
locality  and  invest  considerable  sums;  in  fact,  some  had 
invested  all  their  available  means.  Under  such  conditions 
the  owners,  though  not  legally  responsible,  felt  that  both 
justice  and  policy  obliged  them  to  assist  the  settlers  who, 
through  misrepresentation,  had  been  induced  to  purchase 
their  land. 

A  commissary  was  established  in  the  midst  of  the  colony, 
and  placed  in  charge  of  a  manager  who  was  authorized  to 
make  specific  advances  to  the  settlers,  of  seeds,  plants,  and 
the  requisite  tools  and  fertilizers  in  proportion  to  their 
needs,  as  single  men,  married  men  without  children,  and 
married  men  with  children. 


SUBDIVISION   PROPERTIES 


199 


o 


200          REAL  ESTATE  ACCOUNTS 

In  order  that  the  main  office  might  be  kept  informed  of 
these  matters  without  being  encumbered  with  detail,  the 
manager  was  instructed  to  open  an  account  with  each  settler 
and  to  charge  him  with  all  goods  supplied  under  the  above- 
mentioned  instructions.  At  the  end  of  each  month  he  sub- 
mitted a  statement,  which,  as  it  may  serve  as  a  basis  for 
similar  reports  and  records  elsewhere,  is  given  here 
(Form  46). 

This  statement  gives  the  commissary  credit  for  the  ad- 
vances, charged  at  the  usual  current  prices,  and  enables  the 
storekeeper  to  make  up  his  periodical  profit  and  loss  account 
in  the  usual  way ;  the  totals  of  these  advances  being  charged 
to  the  individual  settlers  in  the  general  books  each  month. 
As  crops  ripened,  the  manager  marketed  them,  and  credited 
the  returns  to  the  owner,  as  indicated  in  Form  46. 


CHAPTER    XXIII 

EARNED  PROFITS  ON  SUBDIVISION,  DEVELOP- 
MENT,  AND   SUBURBAN    PROPERTIES 

§  1 66.    Determination  of  Earned  Profits 

While  the  principle  upon  which  earned  profits  on  sub- 
division sales  are  determined  is  simple  (See  §§  144,  145), 
difficulties  often  arise  in  practice.  For  instance,  it  frequently 
happens  that  a  tract  of  land  is  divided  into  hundreds,  or 
even  thousands,  of  subdivisions — either  farms  or  lots — and 
the  number  of  purchasers  also  runs  into  the  hundreds  or 
thousands,  each  purchaser  necessarily  having  his  own  ac- 
count in  a  sub-ledger.  Under  such  conditions,  the  payments 
are  usually  small,  sometimes  as  low  as  one  dollar  a  month, 
which  makes  it  impracticable  to  compute  the  earned  profit 
on  each  payment  or  on  each  contract,  unless  there  has  been 
adopted  some  method  similar  to  that  described  in  §  174.  If 
such  a  method  were  adopted,  profits  would  be  arrived  at  by 
basing  calculations  on  totals  and  averaging  the  results.  For 
this  the  following  facts  are  necessary:  (i)  cost  price;  (2) 
selling  price;  (3)  profit,  i.e.,  selling  price  less  cost  price; 
(4)  payments  actually  made.  Having  these  we  can  readily 
solve  the  equation : 

Payments  made 

.. X  total  gam  =  earned  profits 

Total  purchase  price 

The  question  then  is,  how  best  to  obtain  these  figures, 
as  they  seldom  appear  on  the  face  of  the  books  found  in  real 
estate  offices, 

20 1 


202  REAL   ESTATE   ACCOUNTS 

§  167.    The  Cost  Price 

The  cost  price  is  discussed  in  Chapters  X  and  XI.  This 
price,  however,  is  not  necessarily  uniform  throughout  an 
entire  tract.  Owing  to  their  situation,  some  parts  sell  for  a 
higher  price.  Sometimes  one  concern  may  sell  out  a  division 
for  another  company,  transferring  outstanding  contracts  at 
their  face  value  or  at  some  figure  based  thereon.  There 
will  be  no  profit  from  these  contracts  to  the  buyer,  and,  in 
the  event  of  cancellation,  the  cost  price  of  the  lot  will  be 
the  amount  paid  for  the  contract.  Or  again,  it  may  be 
advantageous  to  redivide  a  subdivision  on  account  of  differ- 
ences in  the  sizes  of  the  lots,  the  quality  of  the  soil,  and 
other  similar  variations. 

These  instances  show  that  causes  other  than  improve- 
ments may  produce  a  variety  of  cost  prices  for  the  lots  in 
one  subdivision.  In  a  case  of  this  kind  it  is  well  to  have 
different  "series"  of  accounts  for  the  subdivision  affected, 
in  order  to  keep  together  lots  having  the  same  cost  price. 
The  reason  for  this  will  be  apparent  when  we  come  to  the 
calculation  of  earned  profits. 

§  168.    The  Selling  Price 

The  average  selling  price  is  more  difficult  to  determine, 
for  it  seldom  happens  that  all  the  lots  are  sold  at  the  same 
price.  Corner  lots  and  the  larger  lots  command  a  higher 
price  than  others.  Moreover,  if  the  development  of  a  par- 
ticular tract  has  been  successful,  prices  advance  from  time 
to  time  and  a  late  purchaser  may  have  to  pay  a  higher  price. 
It  may  also  happen  that  one  purchaser  will  buy  a  number 
of  lots  and  thereby  obtain  a  reduction  from  the  current 
schedule. 

Under  such  circumstances,  the  actual  average  selling 
price  of  the  lots  covered  by  the  open  contracts  should  be 

J 


EARNED   PROFITS  2O-j 

obtained  by  listing  the  original  amount  of  all  the  open 
contracts,  and  dividing  this  total  by  the  number  of  lots 
included  in  those  contracts. 

§  169.    The  Average  Profit 

The  average  profit  is  the  difference  between  the  average, 
selling  price  and  the  average  cost,  and  is  represented  by  the 
following  formula: 

Original  amount  of  contracts 

0 average  cost    —     average  profit 

Number  of  lots  in  contracts  per  \o^  per  \0^ 

§  170.    Amount  of  Payments  Actually  Made 

The  amount  paid  on  any  one  series  of  outstanding  con- 
tracts may  not  be  readily  ascertained  from  the  balance  of 
the  general  ledger  account,  which  includes  cancellations  as 
well  as  payments  upon  contracts  which  have  been  fully  paid 
up  and  closed. 

In  order  to  obtain  this  necessary  figure,  a  list  of  the 
balances  in  the  sub-ledger  is  taken  off  on  an  adding  machine. 
To  facilitate  checking,  it  is  convenient  to  use  blank  paper  of 
journal  size  instead  of  the  usual  strips,  showing  a  total  at 
the  end  of  each  letter  (i.e.,  each  alphabetical  division)  and 
putting  only  two  columns  on  a  page;  the  totals  under  the 
various  letters  being  then  listed  in  order  to  obtain  the 
grand  total. 

After  this  has  been  done,  the  list  is  put  through  the  add- 
ing machine  again,  and  the  original  amounts  of  these  same 
contracts  are  added  in  a  similar  manner.  The  lists  are  then 
checked  back,  and  at  the  same  time  there  is  inserted  the 
number  of  lots  covered  by  each  contract,  and,  when  the 
checking  is  completed,  the  total  of  these  is  obtained.  The 
following  example  will  show  more  clearly  the  appearance 
of  such  sheets: 


204 


REAL  ESTATE  ACCOUNTS 


Original 
Price 
$150.00 
250.00 

$400.00 


No.  of 

Lots 

I 

2 


Balance 
Feb.  28,  1917 
$125.00 
232.50 


$357-50 


D 


$300.00 

2 

$275.00 

300.00 

2 

270.00 

300.00 

2 

270.00 

500.00 

4 

340.00 

$1,400.00 


10 


$1,155.00 


$300.00 

2 

$200.00 

150.00 

I 

125.00 

125.00 

I 

1  2O.OO 

$575-oo 


$505.00 


We  have  now  all  the  information  necessary  to  solve  the 
equation  in  §  169,  viz: 

1 .  Payments  made  are  found  by  subtracting  the  balance 
of    open    contracts    from    the    original    amount    of    those 
contracts. 

2.  The  original  amount  of  the  contracts  is  taken  from 
the  machine  list. 

3.  The  number  of  lots  also  is  taken  from  the  machine 
list. 

4.  The  average  profit  is  found  by  subtracting  the  cost 
price   (which  is  an  established  figure)   from  the  average 
selling  price,  obtained  by  dividing  the  amount  of  the  original 
sales  by  the  number  of  lots  in  those  sales. 


EARNED   PROFITS 


205 


§  171.    Reserve  Profit  Account 

There  is,  however,  a  modification  of  this  method  of 
averaging  profits  which  is  preferable.  In  practice,  the 
auditor  may  be  unable  to  check  every  small  item  in  all  the 
accounts  connected  with  these  contracts;  his  time  may  be 
limited,  or  his  instructions  may  not  include  it.  His  chief 
object  is  to  see  that  a  fair  amount  is  carried  to  Profit  and 
Loss  account,  and  also  to  see  that  no  profit  is  anticipated ; 
in  other  words,  that  a  proper  reserve  is  maintained  for 
uncompleted  contracts. 

This  being  the  case,  it  is  usually  safer  to  calculate  the 
unearned  profits  to  be  retained  in  the  Reserve  Profit  account, 
and  to  carry  all  the  surplus  in  the  Gain  account  to  Profit  and 
Loss;  rather  than  to  calculate  the  earned  profits  to  be 
carried  to  the  Profit  and  Loss  account.  This  calculation 
is  formulated  as  follows: 

balances  unpaid  unearned 

X  total  profit  = 


total  selling  price    '  profits 

If  this  plan  is  followed,  the  profit  kept  in  reserve  will 
always  be  sufficient  to  care  for  all  uncollected  portions  of 
sales,  and,  even  if  no  more  payments  be  made,  the  Profit  and 
Loss  account  will  not  be  disturbed. 

§  172.    Application  of  Rule 

In  order  to  prove  the  correctness  of  this  rule,  and  also 
to  show  more  clearly  the  various  details,  refer  to  the  illustra- 
tion in  §§  144  and  145,  and  assume  that,  instead  of  this 
property  being  sold  as  a  whole,  it  was  subdivided  into  5,000 
lots  or  tracts  which  were  sold  on  time,  the  sales  being  com- 
pleted as  before  in  five  periods,  and  the  payments  made 
regularly  and  deeds  issued  as  the  respective  contracts  were 
paid  up,  as  shown  in  column  "X"  of  the  following  tabulated 


2o6 


REAL    ESTATE    ACCOUNTS 


statement.  In  order  to  apply  a  double  test,  assume  as  a 
second  hypothesis  that — with  the  same  sales  and  the  same 
collections — payments  were  made  with  great  irregularity 
and  that  some  purchasers  paid  in  advance  and  obtained  their 
deeds,  while  others  fell  in  arrears  to  such  an  extent  that 
their  payments  were  almost  negligible.  These  figures  are 
placed  in  column  "Y." 

The  tract  being  divided  into  5,000  lots  and  costing 
$60,000,  the  average  cost  price  is  $12  per  lot;  and  the  total 
selling  price  being  $180,000,  the  average  selling  price  is  $36 
per  lot,  yielding  a  profit  of  $24  a  lot. 


Lots 
Sold 

Collections 

No.  of  Contracts 
Paid  in  Full  and 
Deeds  Given 

"X" 

"Y" 

First  period  

2,000 
1,250 
1,250 
500 

$24,000 
30,000 
36,000 
42,OOO 
48,000 

O 
O 
O 

2,500 
2,500 

650 
800 

1,000 
1,200 

1,350 

Second    '        

Third       "      

Fourth            

Fifth         "        

•"•"•-  «.-i 

f.OOO 

$180.000    t;.ooo 

^.000 

In  the  following  examples,  the  balances  are  worked  out 
in  detail  from  the  tabular  statement  just  given,  in  order  to 
show  exactly  how  these  balances  are  arrived  at.  The 
different  letters  used  have  the  following  significance: 

(a)  is  the  balance  appearing  on  the  ledger. 

(b)  is  obtained  by  adding  the  original  amounts  of  all 
open  contracts  as  explained  in  §  170. 

(c)  is  also  obtained  from  the  sub-ledger  as  detailed  in 
§  170- 

(d)  is  the  average  profit  per  lot,  obtained  by  reducing 
the  following  formula : 

Original  amount  of  open  contracts 


Number  of  open  contracts 


—  cost  per  lot 


so; 


'At  close  of  first  period: 
Balance  of  Gain  Account  (2,000  X  $24)  ..............     Cr.  $48,000.00 

(a)  Balance  of  Contracts   (2,000  X  $3^)  — 

$24,000  =  ..............................  $48,000 

(b)  Original    amount    (2,000)^  $36)  ...........  $72,000 

(c)  Number  of  lots  in  open  contracts  =  ......       2,000 

(d)  Average  profit  per  lot  =  .................         $24 

Earned  Profit  =  $48,000  —  1  -  —  -  -  X2>00°X$24f  ==    Dn    l6.ooo-o° 

v«p72,OOO  J  - 


At  close  of  second  period: 

Balance  forward  of  Gain  Account  ...................     Cr.  $32,000.00 

Add  gain  on  1,250  lots  at  $24  ........................     Cr.   30,000.00 

Cr.  $62,000.00 

(a)  $48,000  +  (1,250  X  $36)  —$30,000=  ......  $63,000 

(b)  $72,000  +  (1,250  X  $30)  =  ...............  $117,000 

(c)  2,000-1-1,250=  ........................       3,250 

(d)  $24 

Earned  Profit  =  $62,000  —  -j  -  -  '-  —  X  3>25°  X$24  |  =Dr-    20,000.00 

v  Ip  1  1  7,OOO  J  _^__-_^ 

At  close  of  third  period: 

Balance  forward  of  Gain  Account  ....................     Cr.  $42,000.00 

Add  gain  on  1,250  lots  at  $24  .........................     Cr.   30,000.00 

Cr.  $72,000.00 

(a)  $63,000  -f-    (1,250  X  $36)  —  $36,000  =  ----  $72,000 

(b)  $117,000+   (1,250  X  $36)  =  ........  ......  $162,000 

(c)  3,250+   1,250=  .......................       4,500 

(d)  $24 


C  ^R*7c?  cwi  "^ 

Earned  Profit  =  $72,000  —  -\  -  '.  -  V  4,500  V  $24  \-  =      Dr.    24,000.00 
L$i62,ooo  -- 

At  close  of  fourth  period: 

Balance  forward  of  Gain  Account  ...................     Cr.  $48,000.00 

Add  gain  on  500  lots  at  $24  ..........................     Cr.    12,000.00 

Cr.  $60,000.00 

(a)  $72,000  +  (500  X  $36) 

(b)  $162,000  +  (500  X  $36)  —  (2,5ooX$36)*=  $90,000 

(c)  4,500+500  —  2,500  =  .................       2,500 

(d)  $24 

*Lots  deeded. 


208  REAL    ESTATE   ACCOUNTS 

Earned  Profit  =  $60,000  —  -j  —     -  X  2,500  X  $24  f  =   Dr-    28,000.00 

Cr.  $32,000.00 
At  close  of  fifth  period: 
The  earned  profits  must  be: 
48,000 


180,000 


-  of  $120,000  (total  profits),  which  is  $32,000. 


EARNED  PROFITS  UNDER  EXAMPLE  "Y" 


At  close  of  first  period: 

Balance  of  Gain  Account Cr.  $48,000.00 

(a)  Balance    of    Contracts    (2,000  y  $36)  — 

$24,000  = $48,000 

(b)  Original  amount  of  open  contracts  (2,000 

X  $36)  —  (650  X  $36)  = $48,600 

(c)  Number  of  lots  on  open  contracts,  2,000 

—  650  = 1,350 

(d)  Average  profit  per  lot  = $24 

Earned  Profit  =  $48,000  -  ^X  :.35°  X  $24\  =    Dr-    16.000.00 

At  close  of  second  period: 

Balance  forward  of  Gain  Account Cr.  $32,000.00 

Add  gain  on  1,250  lots  at  $24 Cr.    30,000.00 

Cr.  $62,000.00 

(a)  $48,000  4-  ( i, 250 X $36)  —$30,000= $63,000 

(b)  $48,600  +  (1,250  X  $36)  —  (800  X  $36)  =  ..  $64,800 

(c)  1,350-1-1,250  —  800  = i  ,800 

(d)  $24 

Earned  Profit  =  $62,000 — -\  —^—  -  X  1,800  X  $24\  =  Dr.    20,000.00 

^$64,800  j  

At  close  of  third  period: 

Balance  forward  of  Gain  Account Cr.  $42,000.00 

Add  gains  1,250  lots  at  $24 Cr.    30,000.00 

Cr.  $72,000.00 

(a)  $63,000  -f-  (1,250  X  $36)  —$36,000= $72,000 

(b)  $64,800  -(-  (1,250  X  $36)  —  (1,000  X  $36)  =  $73,8oo 

(c)  i ,800  -f-  1,250 — 1,000  = 2,050 

Cd)        $24 

/$72  OOO                                          ^ 
T,-,__ _                   -X2>°5°X$24f  =  Dr.    24,000.00 
I  $73,800  J  


EARNED   PROFITS 


209 


At  close  of  fourth  period: 

Balance  forward  of  Gain  Account Cr.  $48,000.00 

Add  gains  500  lots  at  $24 Cr.    12,000.00 

Cr.  $60,000.00 

(a)  $72,000  -f  (500  X  $36)  —  $42,000  = $48,000 

(b)  $73,800  -j-  (500  X  $36)  —  (1,200  X  $36)  =..  $48,600 

(c)  2,050  +  5°° — 1,200  =  .... 1,350 

(d)  $24 

Earned  Profit  =-.  $60,000  —  -{    4  >OO°X  J.35O  X  $24  f    =  Dr.   28,000  on 
1448,600 

Cr.  $32,000  oo 
At  close  of  fifth  period: 
As  in  "X"  =  $32,000 

By  contrasting  extreme  results  in  the  matter  of  advance 
payments  and  payments  in  arrears,  these  two  examples 
afford  an  additional  proof  of  the  statement  that  earned 
profits  in  any  given  case  depend  solely  upon,  and  are  pro- 
portioned to,  the  cash  actually  paid  in,  together  with  other 
credits,  regardless  of  arrears  or  of  advance  payments. 

§  173.    Alternative  Methods 

It  may  be  worth  while,  in  passing,  to  mention  a  few 
methods  of  calculating  earned  profits  not  based  on  the  prin- 
ciples above  stated  and  to  show  the  possible  difficulties  or 
errors  which  may  arise  in  relation  to  each. 

1.  It  is  sometimes  attempted  to  apply  the  formula  for 
earned  profits,  as  stated  in  §  145,  to  the  controlling  account 
in  the  general  ledger,  instead  of  to  the  balances  taken  from 
the  sub-ledgers.     This  is  not  to  be  recommended  as  it  is 
often  difficult  to  get  the  proper  figures  from  the  controlling 
account,  owing  to  entries  made  in  it  relating  to  cancellations, 
transfers,  etc.,  and  this  difficulty  is  materially  increased  if 
the  accounts  have  been  running  for  a  number  of  years. 

2.  Another  method  is  to  use  the  following  formula: 

Profits  in  full  onli  /proportion   of   profits^  _ 
all  lots  deeded   J      Ion  uncompleted  salesj  ~ 


2io  REAL    ESTATE   ACCOUNTS 

This  method  presents  the  difficulties  mentioned  in  con- 
nection with  the  preceding  method,  together  with  others 
peculiar  to  itself.  The  chief  source  of  error  lies  in  the  fact 
that  partial  profits  on  any  given  lot  are  taken  each  period 
as  earned,  and  when  the  lot  is  finally  paid  for  and  a  deed 
given  therefor,  the  entire  profit  is  taken,  including  the  partial 
profits  already  taken — an  evident  duplication  of  profits, 
which  leads  toward  disaster. 

3.  Another  and  more  usual  plan  of  calculating  earned 
profits  is  to  employ  the  following  formula: 

Total  receipts , 


Total  sales 


X  balance  of  Gain  account 


The  fallacy  of  this  method  is  that  the  receipts  and  the 
sales  cover  all  the  transactions  relating  to  the  open  contracts 
since  the  beginning  of  these  contracts,  while  the  balance  of 
the  Gain  account  is  being  periodically  diminished  by  the 
profits  regarded  as  earned.  If  sales  have  been  made  with 
regularity,  the  results  may  be  approximately  correct ;  if,  on 
the  other  hand,  they  have  been  irregular,  serious  error  mav 
creep  in. 

§  174.    Special  Subdivision  Ledger 

It  is  frequently  difficult  to  ascertain  the  earned  profits 
from  subdivision  property,  owing  to  the  large  number  of 
items  and  to  the  various  causes  explained  above.  Special 
forms  of  ledger  (Forms  n,  15,  §§  20,  23)  have  therefore 
been  devised,  showing  at  all  times  the  amount  of  profit 
earned  and  unearned  on  each  lot  under  sale. 

It  will  be  seen  that  the  headings  provide  for  all  the 
essential  facts;  the  date  of  the  contract  and  the  original 
amount  of  the  ledger  entry  being  shown  above  the  money 
column.  The  form  also  shows  the  method  of  making  the 
first  entry,  which  would  appear  on  the  journal  as  follows: 


EARNED   PROFITS  211 

Eureka  Gardens  Contracts $250 

To  Eureka  Gardens  Purchase $125 

Gains 125 

According  to  the  terms  of  this  contract,  the  payment  is 
$10  cash  and  $10  a  month.  In  the  "Debits"  column  is 
entered  the  amount  of  $250  and  in  the  "Reserve"  column 
$125.  Heading  the  "Reserve"  column  there  would  also  be 
shown  the  figure  "50,"  indicating  that,  of  every  dollar  paid 
in,  50  cents  is  "reserve,"  or  unearned  profits.  It  may  be 
noted  that  on  these  forms  unearned  profits  are  called  "re- 
serve," so  that  in  case  the  customer  should  see  the  ledger 
account  (as  he  often  wishes  to  do)  his  curiosity  may  not  be 
excited  as  to  the  amount  of  profit  yielded  by  his  purchase. 

As  succeeding  payments  are  made,  appropriate  entries 
are  made  in  the  "Reserve  Realized"  column.  For  instance, 
each  $10  appearing  in  the  "Credits"  column  will  show  $5 
in  "Reserve  Realized." 

One  important  result  of  the  use  of  such  ledgers  is  that, 
by  adding  all  the  entries  in  the  "Reserve  Realized"  column 
for  any  one  month,  the  amount  of  earned  profits  from  this 
particular  source  during  that  month  may  be  positively  ascer- 
tained, and  this  renders  possible  the  preparation  of  accurate 
monthly  statements  of  actual  earnings. 

A  further  advantage  appears  at  the  end  of  the  year,  when 
a  trial  balance  of  the  entire  ledger  is  taken  off,  showing  the 
balances  due  on  contracts  and  the  balances  of  "Reserve." 
The  difference  between  the  totals  of  the  "Reserve"  and  the 
"Reserve  Realized"  columns  shows  the  amount  of  unearned 
profits  which  must  remain  in  the  Gain  account.  The  sur- 
plus in  Gain  account  above  that  amount  may,  of  course,  be 
safely  carried  to  Profit  and  Loss. 

It  will  sometimes  happen  that  the  reserve  appropriation 
cannot  be  accurately  expressed  in  an  even  number  of  cents. 
In  such  case,  the  reference  figure  shown  at  the  head  of  the 


212  REAL   ESTATE   ACCOUNTS 

"Reserve"  column  should  be  the  number  of  cents  next  below 
the  actual  amount,  omitting  all  fractions.  For  instance, 
supposing  the  profits  were  $128  in  the  instance  given  above, 
the  exact  figure  would  be  55.2;  the  .2  is  omitted,  and,  in 
order  to  keep  the  book  in  balance,  the  slight  difference 
(which  in  this  case  would  be  50  cents)  is  entered  on  a 
"balancing"  account  for  the  subdivision.  The  total  amount 
of  such  fractional  entry  is  so  small  that  it  will  be  perfectly 
safe  to  carry  this  balancing  account  and  to  write  off  a  portion 
each  year,  depending  largely  upon  the  ratio  of  total  cash  col- 
lections for  any  period  to  total  amount  of  contracts  issued. 

§  175.    Use  of  Special  Ledger 

There  is  no  difficulty  in  transferring  to  the  special  ledger 
shown  in  Form  n  (§  20)  or  Form  15  (§  23)  a  set  of 
accounts  which  have  been  kept  in  ordinary  ledger  form, 
the  procedure  being  as  follows: 

A  trial  balance  showing  the  balances  of  contracts  out- 
standing is  taken  off  the  old  sub-ledger,  and  the  following 
fraction  is  worked  out: 

Balance  of  Gain  account  }<  100       Number  of  cents  in  each  dollar 

Balance  due  on  contracts  uncollected,    which    is    un- 

earned profits 

Each  of  the  debit  balances  on  the  trial  balance  is  then 
multiplied  by  this  number  of  cents  by  means  of  a  calculating 
machine,  and  the  amount  of  the  profit  is  set  against  the 
balance  of  the  contract.  The  total  of  these  being  added,  the 
footings  prove  themselves,  for  the  total  balances  multiplied 
by  the  number  of  cents  of  unearned  profits  should  equal  the 
total  gain.  In  such  cases  a  small  amount  is  usually  left  over, 
as  it  seldom  happens  that  the  fraction  yields  a  whole  num- 
ber; and  this  sum  is  carried  in  the  balancing  account  and 
should  be  written  off  in  the  manner  suggested  above. 


EARNED   PROFITS  213 

It  will  be  seen  that  the  extra  labor  of  keeping  the  ledger 
shown  in  Form  15  is  slight,  and  is  more  than  offset  by  the 
accurate  results  obtained.  Form  15  is  especially  designed 
for  those  cases  where  no  interest,  taxes,  or  other  charges  are 
made  against  the  account — in  other  words,  where  each  pay- 
ment applies  directly  and  entirely  to  a  reduction  of  the  prin- 
cipal ;  while  Form  1 1  is  applicable  to  mortgages  or  contracts 
where  there  are  interest  and  other  charges  and  it  offers 
equal  advantages.  The  method  of  using  the  ledger  shown 
in  Form  1 1  differs  from  that  required  in  connection  with 
Form  15,  inasmuch  as  in  the  former  the  "Reserve"  columns 
are  affected  only  when  a  payment  reduces  the  balance  to 
an  amount  smaller  than  it  was  when  the  last  previous  entry 
was  made  in  the  "Reserve"  columns.  In  other  words,  if  a 
purchaser  makes  payments  covering  interest,  or  any  other 
charge,  such  payments  do  not  affect  the  reserve. 

The  ledgers  shown  in  Forms  1 1  and  1 5  have  been  in  use 
for  a  number  of  years  and  the  results  obtained  from  them 
are  entirely  satisfactory.  They  not  only  greatly  reduce  the 
work  of  an  auditor,  but  they  do  away  with  all  the  uncer- 
tainties; giving  positive,  reliable  figures  instead  of  the 
approximations  obtained  by  the  methods  described  in  §  1 68 
et  scq. 

§  176.    Holding  Subdivision  Properties 

Subdivision  properties  are  held  under  similar  conditions 
and  subject  to  the  same  rules  as  any  general  property.  The 
only  difference  in  treatment  required  is  the  frequent  verifica- 
tion of  the  plats  or  lists  showing  the  unsold  lots,  and  the 
comparison  thereof  with  the  balance  of  the  account  show- 
ing the  cost  price;  for  it  is  evident  that  the  great  number 
of  detailed  sales  found  in  any  larger  subdivision  may  easily 
lead  to  errors  unless  a  constant  watch  be  kept. 


I 


CHAPTER    XXIV 
SELLING    CONTRACTS 

§  177.    Definition  of  Selling  Contract 

A  "selling  contract"  is  an  agreement  between  the  owner 
of  land  and  an  agent  who  undertakes  the  sale  of  his  property. 
Under  such  a  contract  the  concern  is  therefore  an  agent, 
usually  acting  under  a  special  agreement  and  having  clearly 
defined  rights,  duties,  and  powers.  The  terms  of  such  con- 
tracts vary  greatly,  but  as  a  rule  they  give  an  agent  the 
exclusive  right  for  a  definite  time  to  sell,  under  stipulated 
conditions. 

Frequently  the  agent  undertakes  to  bear  all  or  part  of 
the  expense  of  advertising,  and  sometimes  that  of  develop- 
ment also.  The  agreement  usually  prescribes  the  manner 
in  which  the  agent  shall  make  payments  to  the  owner,  which 
is  generally  on  a  percentage  basis,  such  as  $0%  of  the  cash 
collected  monthly,  or  during  some  other  stated  period.  The 
selling  contract,  like  other  agency  contracts,  does  not  neces- 
sarily oblige  the  agent  to  buy  or  to  pay  for  the  land  until 
he  has  sold 'it. 

§  178.    Classes  of  Selling  Contracts 

The  following  examples  are  given  as  typical  selling  con- 
tracts: 

I.  A  contract  under  which  the  agent  undertakes  to  sell 
certain  described  property,  such  as  lots,  at  an  average  price 
per  lot,  and  to  remit  periodically  to  the  owner  a  certain 
portion  of  the  cash  receipts.  All  that  the  agent  obtains 

214 


SELLING   CONTRACTS 


215 


above  the  average  price  is  his  profit,  with  or  without  the 
addition  of  any  payments  on  cancelled  contracts.  In  the 
final  settlement,  he  is  obliged  to  pay  only  for  such  lots  as 
the  owner  may  convey  to  purchasers.  An  example  of  this 
class  of  contract  is  given  in  §  200. 

2.  Contracts  under  which  a  number  of  lots,  or  similar 
property,  are  placed  in  the  hands  of  the  agent,  the  lots  having 
varying  prices  specified  in  the  agreement,  but  the  other 
conditions  being  similar  to  those  of  the  first  class. 

3.  Contracts  under  which  the  owner  gives  the  agent 
sole  selling  rights  to  property  at  a  fixed  price  per  acre,  or 
other  unit  of  value,  the  agent  undertaking  all  expense  of 
developing,  improving,  advertising,  selling,  demonstrating, 
etc.    In  such  cases  the  selling  price  is  fixed  in  various  ways; 
sometimes  it  is  left  to  the  agent,  or  a  minimum  price  is 
stipulated.     The  method  of  paying  the  owner  is  set  forth 
in  the  contract,  and  there  is  occasionally  a  further  agree- 
ment that,  after  the  owner  has  received  the  price  per  unit 
agreed  upon,  and  after  all  the  expenses  of  developing,  etc., 
mentioned  above,  have  been  repaid  to  the  agent,  the  net 
profits  (if  any),  or  the  net  profits  above  a  named  amount, 
are  to  be  divided  between  the  owner  and  the  agent  on  the 
basis  prescribed  by  the  contract.    An  example  of  this  kind 
of  contract  is  found  in  §  204. 

§  179.    Treatment  of  Selling  Contracts  in  the  Accounts 

Under  all  forms  of  selling  contracts,  the  selling  price  of 
lots  sold  is  treated  as  an  asset,  and  the  payment  due  to  the 
owner  as  a  liability,  although  the  liability  is  contingent  upon 
the  completion  of  the  contract  made  with  the  purchaser. 
For  this  reason  it  is  advisable  to  show  such  liabilities  in  the 
balance  sheet  as  an  item  by  themselves.  (See  §  200,  ac- 
count No.  21,  and  §  204,  account  No.  28.)  The  opening 
journal  entry  is  of  the  following  form: 


2i6          REAL  ESTATE  ACCOUNTS 

Contracts    $ . 

To  J.  Doe,  Owner 

"    Gain  on  Sales. . 


As  collections  come  in,  payments  are  made  to  J.  Doe, 
owner,  and  debited  to  his  account,  the  balance  of  which 
shows  the  remaining  amount  due  him  for  properties  covered 
by  contracts.  Care  should  be  taken  in  drawing  the  balance 
sheet  to  show  that  this  class  of  liability  is  contingent  upon 
the  contracts  being  completed. 

Special  conditions  are  frequently  inserted  in  selling  con- 
tracts, and  it  is  necessary  in  each  case  that  the  original 
agreement  between  the  owner  and  the  agent  be  examined 
by  the  accountant.  Such  agreements  form  a  prolific  source 
of  contention,  and  the  greatest  care  should  be  taken  to  insure 
the  proper  recording  of  all  points  likely  to  cause  misunder- 
standing, such  as  the  land  covered,  the  term  of  contract, 
the  method  of  payment,  the  sharing  of  commissions  and 
expenses,  and  the  nature  of  any  expense  to  be  borne 
exclusively  by  either  party. 


CHAPTER   XXV 

ANALYSIS    OF    A    TYPICAL    TRIAL    BALANCE* 

§  180.    Clean  Bookkeeping 

Bookkeeping  has  been  defined  as  "a  systematic  record 
of  business  transactions  in  a  form  conveniently  available 
for  reference  with  a  view  to  ascertaining  with  the  minimum 
amount  of  trouble  at  any  time : 

1.  The  detailed  particulars  of  the  transaction  under- 

taken. 

2.  Its  cumulative  effect  upon  business  and  its  financial 

relations  to  others. 

"The  ideal  of  any  system  of  bookkeeping  is  the  maxi- 
mum of  record  with  the  minimum  of  labor." 

It  is  proper  at  this  point  to  lay  stress  on  the  importance 
of  what  may  be  called  "clean"  bookkeeping,  by  which  is 
meant  not  merely  the  absence  of  blots,  erasures,  and  correc- 
tions, but  clean-cut,  definite,  and  precise  entries,  so  that  each 
item  in  the  trial  balance  shows  definitely  some  one  thing. 

Perhaps  one  of  the  most  familiar  examples  of  what  is 
not  "clean"  bookkeeping  is  the  Merchandise  account,  for- 
merly so  often  found  in  the  ledgers  of  mercantile  concerns, 
in  which  the  debits  consisted  of: 
Purchases 
Freight 
Drayage 

Goods  sold  and  returned 
Labor 


*A  bracketed  number  preceding  a  section  heading  indicates  the  number  under 
which  the  account  discussed  in  that  section  appears  in  the  trial  balance  shown  on 
pages  222-225. 

217 


2i8  REAL    ESTATE    ACCOUNTS 

Allowances  and  discounts 
Change  in  inventories 
etc.,  etc. 

and  the  credits  included : 
Sales 

Goods  bought  but  returned  by  the  concern 
Discounts  and  allowances 
Inventories 
etc.,  etc. 

As  the  balance  of  such  an  account  in  itself  meant  noth- 
ing, other  accounts  are  now  substituted,  such  as: 

Purchase  accounts,  consisting  of  debit  charges  for 
goods  bought,  the  only  credits  being  for  goods  re- 
turned to  creditors. 

Sales  accounts,  into  which  are  brought  credit  entries 
for  all  sales,  the  only  debits  being  goods  returned 
by  customers. 

Interest  accounts,  divided  into  (i)  Interest  and  Dis- 
count Paid,  and  (2)  Interest  and  Discount  Re- 
ceived, etc.,  etc. 

The  balance  of  each  of  these  accounts  has  a  definite 
meaning.  In  the  purchase  accounts  and  sales  accounts,  for 
instance,  the  balances  show  respectively  the  actual  net  pur- 
chases and  sales  of  the  period,  a  knowledge  of  which  is  es- 
sential to  good  management.  Such  clean-cut  accounts  are 
important  to  a  real  estate  concern,  especially  to  one  doing 
a  large  business  in  time  sales.  Attention  has  already  been 
called  to  this  matter  (Chapter  XXI)  in  connection  with 
cancellation  of  contracts. 

In  like  manner,  the  Real  Estate  account  should  be  kept 
"clean"  and  should  be  a  debit  account,  the  difference  be- 
tween the  balance  of  this  account  and  of  "Sales"  being,  in 
fact,  a  perpetual  inventory  of  unsold  property.  The  sales 


ANALYSIS   OF  A  TYPICAL  TRIAL   BALANCE 


219 


accounts  should  show  the  sales  divided  in  such  manner  as 
convenience  may  suggest ;  "Commissions"  should  be  divided 
into  "Commissions  Earned"  and  "Commissions  Paid." 

It  is  possible  that  immense  volumes  of  business  may  be 
transacted  in  which  commissions  "earned"  and  "paid"  are 
equal.  In  such  a  case,  the  usual  Commissions  account,  con- 
taining commissions  earned  and  commissions  paid,  would 
show  no  balance,  and  the  trial  balance  would  therefore  give 
no  direct  indication  of  these  transactions.  Probably  the 
account  as  shown  in  the  profit  and  loss  statement  would  not, 
unless  analyzed,  indicate  the  business  really  transacted. 
These  defects  are  remedied  by  a  separation  of  the  accounts, 
and  when  this  is  done  all  statements  taken  from  the  books 
show  clearly  the  result  of  each  set  of  transactions.  The 
same  principle  applies  to  "Interest  Earned"  and  "Interest 
Paid,"  "Options  Granted"  and  "Options  Bought,"  "Rents 
Collected"  and  "Repairs."  The  keeping  of  such  accounts 
adds  nothing  to  the  labor,  for  in  either  case  each  item  must 
be  posted  once  and  once  only.  The  advantage  of  this 
method  will  be  further  exemplified  in  connection  with  the 
preparation  of  monthly  reports  in  Chapter  XXVII. 

§  181.    A  Typical  Trial  Balance 

The  trial  balance  shown  on  pages  222-225  brings  in 
examples  of  all  the  types  of  accounts  usually  required  in 
real  estate  accounting.  .  It  affords  a  convenient  basis  for  the 
study  of  such  accounts,  by  providing  examples  of  the  vari- 
ous methods  of  calculating  profits,  and  illustrating  the  dif- 
ficulties or  irregularities  which  may  occur.  This  trial  bal- 
ance is  based  on  one  taken  from  the  books  of  a  concern 
operating  about  thirty  subdivision  properties.  The  figures 
are  left  practically  as  they  were  found  in  the  course  of  audit- 
ing, and  the  trial  balance  as  given  may  therefore  be  con- 
sidered an  example  from  actual  practice. 


220  REAL    ESTATE   ACCOUNTS 

The  method  of  dissecting  accounts  on  analysis  paper,  as 
shown  in  connection  with  the  trial  balance,  is  familiar  to 
accountants  and  should  be  clear  to  any  reader.  The  various 
columns  are  introduced  in  order  to  simplify  the  prepara- 
tion of  proper  schedules  to  accompany  the  balance  sheet, 
and  also  to  prove  all  new  entries  made,  especially  those  af- 
fecting Profit  and  Loss,  by  checking  the  balance  of  the 
account  shown  on  the  sheets  against  the  account  in  the 
ledger  after  all  closing  entries  have  been  made. 

The  statement  below  is  a  summary  of  the  trial  balance 
shown  on  pages  222  to  225.  Its  total  is,  naturally,  less  than 
the  total  of  the  trial  balance,  as  sundry  accounts  have  been 
closed  or  adjusted. 

SUMMARY 

Dr.  Cr. 

Profit  and  Loss $99,158.48       $152,170.49 

Real   Estate 779,356.89 

Contracts  568,433.33 

Profits  in  Reserve 361,790.37 

Accounts   Receivable 1,477.00 

Accounts   Payable 695.71 

Balance  Sheet  Items 102,804.52      1,036,573.65 


$1,551,230.22    $1,551,230.22 


§  182.     (i)  Accounts  Payable     (Cr.  $3,420) 

If  business  is  conducted  on  a  cash  basis  and  all  current 
accounts  are  paid  immediately  on  approval,  it  may  not  be 
necessary  to  carry  the  Accounts  Payable  account  through- 
out the  year;  but  when  a  balance  sheet  is  prepared,  it  is 
proper  to  open  such  an  account  in  which  to  enter  all  unpaid 
current  accounts  payable.  Payment  of  such  accounts  pay- 
able should  be  made  on  regular  days,  weekly  or  monthly. 
In  either  case,  all  such  accounts  as  "Pay-rolls"  should  be 


ANALYSIS    OF  A   TYPICAL  TRIAL   BALANCE       22I 

closed,  if  possible,  a  day  or  two  before  the  pay  day,  e.g., 
Thursday  evening  if  Saturday  is  pay  day.  This  enables 
the  clerical  force  to  make  out  the  pay-rolls  in  time  to  have 
them  properly  checked,  distributed,  entered,  and  vouched  for 
payment.  The  payment  of  accounts  on  other  than  regular 
days  should  be  discouraged,  as  it  leads  to  the  loss  of  much 
valuable  time. 

§183.    (2)  Advertising     (Dr.  $12,114.02) 

This  account  should  include  all  charges  for  newspaper 
advertising,  pamphlets,  maps,  and  postage  thereon,  adver- 
tising agents,  etc.  The  total  is  carried  to  Profit  and 
Loss. 

§184.     (3)  Automobiles     (Dr.  $1,138.02) 

This  account  is  intended  to  represent  the  actual  value 
of  motor  cars  owned  by  the  concern.  Three  of  the  cars 
being  new,  no  depreciation  was  taken  on  them.  A  fourth 
car  had  been  reduced  annually  by  2$%  of  its  original  cost, 
and  it  is  believed  this  is  a  fair  standard  rate.  All  repairs 
are  charged  to  the  Expense  account  direct;  for  if  they  were 
charged  to  Automobiles  account,  the  calculation  of  depre- 
ciation,  would  be  involved  unnecessarily.  Some  conserva- 
tive business  men  claim  that  the  life  of  a  motor  is  so  uncer- 
tain a  quantity  that  the  original  cost  of  all  cars  should  be 
charged  direct  to  Expense,  but  this  is  a  rather  extreme  view 
inasmuch  as  a  second-hand  car  has  an  actual  selling 
value. 

§  185.    (4)  Bills  Payable     (Cr.  $81,340) 

A  schedule  should  be  prepared  showing  the  items  com- 
posing the  total  of  this  account,  the  due  date  of  each  note 
and  an  indication  of  the  purpose  for  which  it  was  given, 
e.g.,  "In  payment  for  Barnes  land,"  "Bank  loan,"  etc. 


222 


REAL   ESTATE   ACCOUNTS 


THE   ALPHA 
ANALYSIS  OF  TRIAL 


H  oi 

Z,° 

TRIAL  ] 

BALANCE 

PROFIT 

&  Loss 

<* 

DEBIT 

CREDIT 

DEBIT 

CREDIT 

1 

Accounts    Payable  

$3,420.00 

?, 

Advertising   

$12,114  02 

$12,114  02 

* 

Automobiles    

1,138.02 

400.00 

4 

Bills  Payable  

81,340.00 

S 

Bills   Receivable  

1,250.00 

75.00 

6 

Brick-yard   Royalties  

1,300.00 

7 

Building  —  Green    

1,250.00 

8 

Black  

72  50 

72  50 

9 

325.00 

in 

Cancellation    Profits  

3  400  00 

$3,445.00 

11 

Capital   Stock  

305,000.00 

}?, 

Charity  

37.00 

37.00 

13 

Commissions    Earned  

5,220.00 

5,220.00 

14 

Paid  

8,325.00 

8,325.66 

15 

Contracts    

165  770  00 

16 

"           Payable  

8,002  40 

17 

Dawes  Purchase  

8,640  00 

18 

Directors'    Meetings  

185.00 

185.00 

IP 

Dividends    Unpaid  

520.66 

20 

Eureka  Gardens  Contracts  

2,460  00 

21 

"           Purchase 

1  375.00 

22 

Gains   

1,330.00 

23 

40.00 

40  00 

24 

Expense,  General  

12,440.00 

12,440.00 

25 

Legal  

1,522.00 

1,522.00 

?6 

"          Mortgage  

548.50 

27 

Fairmount    Contracts  

1,915.00 

?8 

Purchase    

1,200.00 

29 

1,200.00 

30 

5,795.00 

31 

88,045.84 

17,857.32 

32 

1  827  42 

33 

5  378.00 

34 

1,056.80 

395.20 

35 

985  00 

36 

Hilton,  A    B  

130.00 

37 

10  000  00 

38 

711  28 

711.28 

39 

283.75 

40 

9,840  00 

9,840.00 

41 

"          Paid  

4,640.00 

4,640.66 

42 
43 

Mortgage    Payable  .... 

11,120.00 

120.66 

11,120.00 



44 

2,400.00 

2,400.66 

45 

1  178  10 

46 

3,529.82 

1,400.08 

47 

925.00 

48 

61  799  88 

49 

1  272  11 

50 

106,902.00 

51 

83  370  60 

52 

751  90 

53 

461  40 

461.40 

54 

55 

30  506  00 

56 

38  840  00 

57 

25,470.00 

io,066.66 

58 

4  229  04 

59 

1,580.00 

60 

10  56P  00 

ANALYSIS   OF  A  TYPICAL   TRIAL   BALANCE 


223 


LAND   COMPANY 
BALANCE— DECEMBER  31,  1916 


— 

REAL 

ESTATE 

CONTRACTS 

[PROFITS  IN 
1     RESERVE 

ACCTS.    ||  ACCTS.   II 
RECEIV.  ''PAYABLE  l|    BALANCE  SHEET  ITEMS 

DEBIT 

DEBIT 

CREDIT 

DEBIT 

CREDIT   :!      DEBIT 

CREDIT 

1 

2 
3 
4 
5 
6 
7 
8 
9 
10 
11 
12 
13 
14 
15 
16 
17 
18 
19 
20 
21 
22 
23 
24 
25 
26 
27 
28 
29 
30 
31 
32 
33 
34 
35 
36 
37 
38 
39 
40 
41 
42 
43 
44 
45 
46 
47 
48 
49 
50 
51 
52 
53 
54 
55 
56 
57 
58 
59 
60 

$3,420.00 

$738.02 

81,340.00 

1,175.00 

$1,250.00 

325.00 

305,000.00 

'.'.'.'.'.'.'.  |l  '.'.'.  '.".'.'."" 

• 

$165,770.00 

8,002.40 

8,640.00 

52U.OO 

2,205.00 

1,195.00 

$1,210.00 

548.50 

1,915.00 

1,200.00 

1,200.00 

5,795.00 

70,188.52 

1,827.42 

5,378.00 

1,452.00 

985.00 

$130.00 

10,000.00 

283.75 

120.00 

1,178.10 

2,129.74 

925.00 

61,799.88 

1,272.11 

51,738.11 

17,206.71 
'    751.90 

11,000.00 

30,506.00 

45,569.04 

15,404.00 

2,500.00 
1,580.00 

10,560.00 

224 


REAL    ESTATE    ACCOUNTS 


THE  ALPHA 
ANALYSIS  OF  TRIAL 


§8 

<* 

ACCOUNTS 

TRIAL  BALANCE 

PROFIT  &  Loss 

DEBIT 

CREDIT 

DEBIT 

CREDIT 

61 
62 
63 
64 
65 
66 
67 
68 
69 
70 
71 
72 
73 
74 
75 
76 
77 
78 
79 
80 
81 
82 
83 
84 
85 
86 
87 
88 
89 
90 
91 
92 
93 
94 
95 
96 
97 
98 
99 
100 
101 
102 
103 
104 
105 
106 
107 
108 
109 
110 
111 
112 
113 
114 
115 
116 
117 

Life  Insurance  

2,120.00 
37,467.00 
34,057.00 



2,120.00 

Malvern  Hill  Contracts  

"     Purchase  

23,022.00 

9,922.19 

7.25 

7.25 

Manning,    R  

212.00 
2,000.00 
257,422.30 

Mortgage  Deficiency  Account  .  . 

Receivable    

45,000.00 
5,250.00 
3,200.00 
3,156.00 

in    Settlement  

480.00 
473.40 

"       Fixtures   

5,200.00 

"         Held    

3,400.00 
18,842.00 

Parkville  Contracts  

8,725.00 
9,796.00 

1.87 

783.20 
275.00 
75.00 
725.00 

783.20 
275.00 

Petty  Cash  i 

725.00 

Profit  &  Loss  ! 

75,405.10 
8,242.10 

Profits      

8,242.10 

1,158.98 

1,576.00 

587.42 

3,402.00 
85.00 
473,130.13 

"              "      Expense     

85.00 

Real    Estate  

5,780.00 

5,780.00    , 

1,245.60 
280.00 

1  245  60 

Rinders,  T  

525.33 
210,418.52 

. 

23,805.00 
212,814.00 

23,805.00 

' 

239,657.65 

72,388.65 

95,580.00 
32,850.00 

'       "     Villa    Contracts  

32,640.00 

5,019.86 

29,550.00 
19,560.00 
32,805.00 
4,750.00 





11,000.00 
4,750.00 

72,000.00 

422.00 
472.00 

472.00 

6,250.00 

750.00 
398.63 
308.15 
11,283.00 

Taxes   



398.63 

' 

4,450.66 
5,220.00 
470.00 

"              "        Townley,   J.  R.  ! 
Treasury    Stock  j 

22,000.00 
120.00 
7,990.40 

$1,621,588.86 

$1,621,588.86 

$99,158.48 

$152,170.49, 

ANALYSIS    OF    A    TYPICAL    TRIAL    BALANCE 


225 


LAND  COMPANY 
BALANCE— DECEMBER  31,  1916 


ESTATE 
REAL   • 

CONTRACTS 

PROFITS  IN 
RESERVE 

1     ACCTS. 

1  RECEIV. 

1    ACCTS. 
1  PAYABLE 

BALANCE 

SHEET  ITEMS 

DEBIT 

DEBIT 

|      CREDIT 

I    DEBIT 

CREDIT 

DEBIT 

CREDIT 

61 

i 

62 

37,467.00 

63 

34  057.00 

64 

13,099.81 

65 

66 

$212.00 

67 

2,000  00 

68 

257,422.30 

69 

45  000  00 

70 

5,250.00 

71 

2,720.00 

72 

2  682  60 

73 

5,200.00 

74 

3,400.00 

75 

8,837.6s 

1  

76 

.'.' 

3  950.00 

77 

4,564.18 

78 

79 

80 

75  00 

81 

82 

|  

75  405  10 

83 

84 

1,158.98 

85 

694  87 

86 

3,402.00 

87 

88 

465,580.13 

89 

90 

91 

13.71 

92 

525  33 

93 

210  418  52 

94 

95 

212,814.00 

96 

167,269.00 

97 

107,580.00 

98 

32,850.00 

99 

27,620.14 

100 

35  550  00 

101 

23  365  00 

102 

103 

104 

72,000.00 

105 

422.00 

106 

107 

108 

750.00 

109 

110 

308.15 

111 

11,283.00 

112 

4,450.00 

113 

5,220.00 

114 

470.00 

115 

22,000.00 

116 

120  00 

117 

7,990.40 

$779,356.89 

$568,433.33 

$361,790.37 

$1,477.00 

$695.71 

$102,804.52 

$1,036,573.65 

226  REAL    ESTATE   ACCOUNTS 

§  1 86.     (5)  Bills  Receivable     (Dr.  $1,250) 

This  account  also  should  be  accompanied  by  a  schedule 
similar  to  that  mentioned  above.  Each  item  should  be  ex- 
amined, and  if  any  one  appears  to  be  of  doubtful  value,  it 
should  be  written  off  to  Profit  and  Loss  or  to  a  "Suspense" 
account.  In  the  instance  given,  notes  aggregating  $75  were, 
after  consultation  with  the  officers  of  the  company,  treated 
as  worthless. 

•  §  187.    (6)  Brick-yard  Royalties    (Cr.  $1,300) 

This  is  a  typical  royalty  account,  a  brick-yard  having 
leased  a  portion  of  certain  property  for  the  purpose  of  work- 
ing a  clay  bed  thereon,  paying  as  rental  a  specified  royalty 
on  every  thousand  bricks  burned.  Monthly  statements  have 
been  submitted  showing  the  brick  manufactured,  and  these, 
checked  against  the  brick-yard  "inventories"  and  "sales" 
records,  are  found  to  be  correct. 

As  the  working  of  this  clay  bed  resulted  in  several  large 
excavations,  the  land  worked  over  was  rendered  useless  for 
any  other  purpose.  The  royalties  were  therefore  credited 
to  the  property  in  question,  thus  reducing  its  "cost"  and 
providing  for  an  increased  profit  when  the  salable  part 
should  be  disposed  of.  If  the  entire  tract  had  been  leased, 
such  royalties  would  have  been  credited  in  the  above  manner 
until  they  equalled  the  book  value  of  the  land,  and  all 
amounts  in  excess  of  that  would  be  carried  to  Profits  ac- 
count. 

*  §  188.    (7)  Building— Green      (Dr.  $1,250) 

This  account  shows  the  cost  to  date  of  a  house  which 
the  concern  agreed  to  build  for  Mr.  Green,  the  final  cost 
(not  to  exceed  $1,500)  to  be  charged  to  his  "Contract." 
The  house  not  yet  being  completed,  the  amount  spent  stands 
as  an  asset.  Since  this  is  an  improvement  to  real  estate, 


ANALYSIS   OF  A  TYPICAL  TRIAL  BALANCE 


227 


the  amount  thereof  is  carried  in  the  "Real  Estate"  column 
(§58). 

•§  189.     (8)  Building— Black      (Dr.  $72.50) 

This  account  represents  a  house  which  it  was  agreed 
should  be  built  for  Mr.  Black  for  $2,500,  that  amount  being 
included  in  the  mortgage  which  he  has  given,  and  which 
was  placed  originally  to  the  credit  of  this  account.  On  com- 
pletion the  house  is  found  to  have  cost  $2,572.50,  the  excess 
of  $72.50  being  a  loss  to  the  company. 

This  loss  having  been  already  incurred  and  the  amount 
(as  is  usual  in  such  cases)  being  inconsiderable,  it  is  charged 
direct  to  Profit  and  Loss.  It  would  have  been  equally  cor- 
rect to  have  charged  it  against  Gain  on  Sales,  but  a  great 
number  of  such  cross-entries  would  tend  to  obscure  the 
Gain  on  Sales  account  and  it  is  better  to  charge  such 
amounts  off  direct. 

.§190.     (9)  Building— Brown      (Cr.  $325) 

This  account  is  for  a  house  to  be  built  for  Mr.  Brown  at 
a  cost  of  $2,000,  which  amount  was  charged  to  his  contract 
or  mortgage  account.  The  house  is  not  yet  completed,  and 
the  unpaid  balance  of  $325  appears  among  the  liabilities. 

§  191.     (10)  Cancellation  Profits     (Cr.  $3,400) 

This  account  has  been  credited  during  the  past  year  with 
all  payments  made  on  sales  which  have  been  cancelled.  ( See 
§  153.)  These  payments  having  been  actually  received,  the 
amount  goes  to  the  Profit  and  Loss  account.  The  entry 
described  in  §  200  increases  the  original  amount  by  $45. 

§192.     (IT)  Capital  Stock     (Cr.  $305,000) 

The  balance  of  this  account  should  be  verified  and  proved 
to  be  in  accordance  with  the  capital  stock  certificates  out- 


228         REAL  ESTATE  ACCOUNTS 

standing.  (See  §  296,  also  §  251.)  A  list  of  stockholders 
should  be  prepared  by  the  auditor  or  secretary  of  the  con- 
cern for  purposes  of  checking  and  comparison. 

§193.    (12)  Charity     (Dr.  $37) 

The  name  explains  the  account,  which  shows  all  amounts 
given  to  charity.  The  total  is  carried  to  Profit  and  Loss. 

§  194.     (13)  Commissions  Earned     (Cr.  $5,220) 
(14)  Commissions  Paid     (Dr.  $8,325) 

These  accounts  represent  cash  receipts  and  expenditures, 
or  their  equivalents,  received  by  the  concern  acting  as  broker, 
or  paid  by  the  concern  to  agents  \vho  have  sold  its  property. 
It  is  far  better  to  keep  these  in  separate  accounts  (see 
§  181),  the  balances  being  carried  to  Profit  and  Loss. 

§  195-    (15)  Contracts     (Dr.  $165,770) 

This  account  includes  all  general  sales  on  the  instalment 
plan,  exclusive  of  those  secured  by  mortgage  and  of  those 
described  as  "subdivision"  sales.  The  balance  must  agree 
with  the  total  of  the  Contracts  accounts  shown  on  the  sub- 
ledger  ;  and  those  contracts  must  be  examined  by  the  auditor 
to  make  sure  that  all  proper  cancellations  have  been  made 
and  that  the  total  includes  only  "live"  accounts. 

§196.     ( 1 6)  Contracts  Payable      (Cr.  $8,002.40) 

These  are  contracts  made  or  assumed  by  the  concern,  for 
which  it  is  responsible.  They  usually  represent  the  pur- 
chase price  on  properties  which  have  been  acquired.  If  they 
are  numerous,  a  sub-ledger  must  be  kept;  but  when  com- 
paratively few,  the  details  of  each  can  readily  be  "picked 
out"  from  the  Contracts  Payable  account  in  the  general 
ledger. 


ANALYSIS    OF   A   TYPICAL   TRIAL   BALANCE 


229 


§  J97-     C1?)  Dawes  Purchase     (Dr.  $8,640) 

This  account  represents  the  purchase  price  of  a  tract 
acquired  from  Mr.  Dawes.  The  property  is  to  be  improved, 
but  the  plans  for  this  work  are  not  yet  complete,  and,  since 
the  matter  is  being  held  in  suspense,  the  present  account  is 
kept  until  a  final  disposition  can  be  made.  (For  final  dis- 
position on  such  accounts,  see  §  221.) 

§  198.    (18)  Directors'  Meetings     (Dr.  $185) 

The  principle  of  paying  fees  to  directors  for  attending 
meetings  is  spreading  in  this  country,  and  if  it  is  true  that 
a  thing  is  worth  just  what  is  paid  for  it,  the  practice  is  a 
good  one.  At  all  events,  it  tends  to  insure  a  better  attend- 
ance at  such  meetings,  and  for  that  reason  is  worthy  of 
adoption.  The  fees  paid  are,  of  course,  chargeable  direct 
to  Profit  and  Loss. 

§  199.     (19)  Unpaid  Dividends     (Cr.  $520) 

Immediately  after  the  close  of  the  previous  year,  a  divi- 
dend was  declared  which  amounted  to  $27,142,  and  this 
amount  was  debited  through  the  journal  to  Profit  and  Loss 
and  credited  to  "Unpaid  Dividends."  As  the  dividends  were 
paid  the  payments  were  charged  from  the  cash  book  to  this 
account,  the  balance  showing  the  amount  remaining  unpaid. 
A  list  showing  the  amounts  of  all  items  included  in  this 
balance  and  the  names  of  those  to  whom  they  were  due, 
accompanied  the  annual  report. 

The  payment  of  dividends  in  a  corporation  with  a  large 
number  of  stockholders  necessitates  the  drawing  and  en- 
tering of  a  large  number  of  checks.  It  is  not  necessary  that 
each  of  these  should  pass  through  the  general  cash  book, 
but  if  they  do,  a  column  headed  "Dividends"  should  be  pro- 
vided. The  usual  method  is  to  deposit  in  a  special  bank 
account  the  amount  required  to  pay  dividends,  either  in 


230 


REAL    ESTATE    ACCOUNTS 


one  sum  or  smaller  sums,  as  may  be  convenient,  and  to 
issue  against  this  account  special  checks  marked  "Dividend 
Check."  This  renders  the  checking  of  this  account  a  simple 
matter  and  tends  to  "clean"  accounts. 

§  200.    Eureka  Gardens  Accounts 

(20)  Contracts,  Dr.  $2,460 

(21)  Purchase,  Cr.     1,375 

(22)  Gains,  Cr.     1,330 

(23)  Expense,  Dr.          40 

These  four  accounts  relate  to  a  subdivision  which  is 
being  handled  on  a  "selling  contract"  similar  to  that  desig- 
nated in  §  178  as  No.  i.  The  subdivision  is  a  small  one, 
in  which  there  appear  to  have  been  included  eighteen  lots 
costing  $90  each  ($1,620  for  all),  and  selling  for  a  total  of 
$2,950,  thus  yielding  a  gain  of  $1,330.  The  collections 
amount  to  $490,  leaving  due  $2,460.  Half  the  collections 
($245)  having  been  paid  to  the  owners,  there  remains 
$1,375  to  be  paid  to  them  as  collections  are  made  from  the 
contract  holders. 

An  examination  of  the  contracts  shows  that  those  cover- 
ing two  lots,  on  which  a  total  of  $45  has  been  paid,  are  in 
default  and  the  purchasers  have  stated  that  they  will  pay 
no  more.  These  contracts  were  originally  for  $300.  The 
following  entry  is  made : 

Eureka  Gardens  Purchase $180 

Eureka  Gardens  Gains 120 

To  Eureka  Gardens  Contracts $255 

"    Cancellation   Profits 45 

The  item  for  expense  being  payable  by  the  concern  is 
written  off  to  Profit  and  Loss. 


ANALYSIS  OF  A  TYPICAL  TRIAL  BALANCE 


231 


§201.     (24)  Expense,  General     (Dr.  $12,440) 
This  account  covers  such  items  as: 

Office  rent 

Telephones 

Telegrams 

Branch  office  rent  and  expenses 

Motor  car  repairs 

The  items  chargeable  to  this  account  are  of  great  va- 
riety. It  is  well  in  each  case  to  have  a  detailed  list  made 
and  perhaps  written  on  the  head  of  the  ledger  account, 
showing  exactly  what  items  are  included.  The  preparation 
of  such  a  list  is  greatly  simplified  if  a  current  analysis  of 
the  account  is  kept  on  Form  41  (§48). 

§202.     (25)  Expense,  Legal     (Dr.  $1,522) 

This  account  includes  attorneys'  fees,  together  with 
recording  and  other  legal  fees  which  cannot  properly  be 
charged  to  the  various  customers. 

§203.    (26)  Expense,  Mortgage     (Dr.  $548.50) 

This  account  shows  all  expenditures  made  on  account  of 
mortgages  receivable  and  chargeable  against  specific  mort- 
gages, being  entered  in  the  mortgages  receivable  sub-ledger 
as  charges  to  the  income  account  of  the  various  mortgages. 
In  this  account  are  included  such  items  as  paving  and  other 
liens,  and  very  frequently  attorneys'  and  court  fees  on  mort- 
gages in  the  course  of  foreclosure.  The  amount  is  carried 
forward  as  an  asset. 

§  204.    Fairmount  Accounts 

(27)  Contracts,  Dr.  $1,915 

(28)  Purchase,    Cr.     1,200 

(29)  Gains,          Cr.     1,200 

(30)  Expense,     Dr.     5,795 


232 


REAL    ESTATE    ACCOUNTS 


These  accounts  relate  to  a  tract  handled  under  a  selling 
agreement  of  type  No.  3  (§  178),  covering  5,000  acres, 
which  has  been  divided  into  ten-acre  lots.  The  concern  is 
to  pay  all  the  expense  of  advertising,  etc.,  and  remit  to  the 
owner  50%  of  all  collections  until  he  has  received  $15  an 
acre,  when  he  will  convey  title  to  the  concern. 

This  is  a  recent  contract  and  the  work  done  to  date  has 
been  for  the  most  part  surveying  and  developing  the  land. 
At  the  present  time,  8  lots  have  been  sold  for  $2,400,  of 
which  $485  has  been  collected.  No  payments  have  yet  been 
made  to  the  owner,  and  the  Purchase  account  therefore 
stands  credited  with  80  acres  at  $15  an  acre.  Attention 
may  be  called  to  the  fact  that  under  this  agreement  the 
concern  loses  nothing  through  reduced  acreage  on  account 
of  streets  and  roads,  inasmuch  as  the  owner  is  paid  only 
for  the  number  of  acres  covered  by  the  deeds  he  grants. 

The  whole  transaction  being  so  new,  all  the  balances  of 
the  Fairmount  Contracts  were  carried  forward  into  the 
balance  sheet,  the  expenses  being  carried  in  the  "Real  Es- 
tate" column,  as  this  money  represents  physical  improve- 
ments from  which  there  is  a  reasonable  prospect  that  the 
concern  will  obtain  a  profit. 

§205.     (31)  Gain  on  Sales     (Cr.  $88,045.84) 

The  method  of  treating  this  account  has  been  fully  de- 
scribed in  Chapter  XIII.  On  completing  the  calculations  as 
there  indicated,  it  is  found  that  of  this  total,  $17,857.32  has 
been  earned  since  the  last  balance  sheet,  and  is  therefore  to 
be  credited  to  Profit  and  Loss. 

§  206.     Grandville  Accounts 

(32)  Contracts,  Dr.  $1,827.42 

(33)  Purchase,    Dr.     5,378.00 

(34)  Gains,          Cr.     1,056.80 


ANALYSIS   OF   A   TYPICAL   TRIAL   BALANCE 


233 


These  accounts  relate  to  a  subdivision  owned  by  the 
concern,  which  was  bought  some  years  ago  under  a  "Con- 
tract Payable."  Analysis  of  the  sub-ledger  shows  that  there 
are  108  lots  under  sale  and  that  the  original  amount  of  the 
contracts  was  $7.607.  The  estimated  book  value  of  each 
lot  is  $14.  The  average  profit,  therefore,  was  $56.43  a 
lot  (say  $56),  and  the  gain  unearned  and  to  be  left  in  would 
be: 

1827 


7607 


X  108  X  56  =  $i,452 


or  more  than  appears  in  the  Gain  on  Sales  account. 

This  led  to  a  further  investigation  and  it  was  found  that 
there  remained  unsold  348  lots,  which  cost  $5,378,  or  $15.45 
a  lot.  This  increased  price  was  caused  by  certain  improve- 
ments on  the  property,  not  considered  when  the  gain  on 
sales  was  entered. 

As  the  lots  are  selling  for  $100  to  $150  each,  it  is  evident 
that  a  cost  price  of  $15.45  is  reasonable;  and  in  order  to 
correct  the  errors,  a  charge  of  $395.20  is  made  against 
Profit  and  Loss  and  credited  to  the  Grandville  Gains  ac- 
count, which  is  now  correct. 

Note  that  account  No.  33  is  in  fact  a  real  estate  account, 
the  property  being  owned  by  the  concern,  and  could  with 
propriety  have  been  kept  in  the  real  estate  ledger.  The  ac- 
count was  opened  when  the  property  was  purchased,  and  is 
kept  because  all  employees  familiar  with  the  books  have  been 
accustomed  to  regard  this  account  as  showing  the  value  of 
the  unsold  part  of  Grandville.  Similar  remarks  apply  to 
No.  34,  which,  in  fact,  is  a  part  of  the  general  Gain  on 
Sales  account. 

§207.     (35)  Handbook     (Dr.  $985) 

This  account  represents  the  cost  of  an  advertising  work 
published  for  free  distribution.  As  few  copies  have  yet  left 


234  REAL    ESTATE    ACCOUNTS 

the  office,  the  amount  is  allowed  to  remain  in  the  balance 
sheet. 

§  208.    (36)  Hilton,  A.  B.     (Dr.  $130) 

This  account  represents  advances  made  to  a  salesman, 
and  is  to  be  deducted  from  future  commissions.  It  is  typi- 
cal of  a  number  of  accounts  which  appear  in  such  trial  bal- 
ances. The  account  will  be  closed  when  these  advances  are 
repaid. 

§  209.    (37)  Improvements     (Dr.  $10,000) 

This  account  is  intended  to  contain  all  expenditures  for 
improvements  as  suggested  in  §  58.  As  such  disbursements 
are  made  they  are  immediately  posted  in  the  property  ledger 
against  the  piece  of  property  to  which  they  refer.  At  the 
closing  of  the  books  at  the  end  of  the  fiscal  period,  the  total 
amount  is  charged  to  Real  Estate,  and  until  this  time  the 
balance  of  the  property  ledger  will  equal  the  Real  Estate 
account  plus  the  Improvements  account.  There  are  sev- 
eral very  distinct  and  important  advantages  (§58)  in  keep- 
ing these  items  in  a  separate  account.  In  the  first  place,  by 
so  doing  the  monthly  report  will  show  on  its  face  all  such 
expenditures.  This  is  always  important  information  ai^is 
essential  where  a  fixed  sum  is  to  be  spent  annually  on  im- 
provements. Furthermore,  such  an  account  provides  auto- 
matically a  list  of  all  properties  so  improved,  for  the  main 
facts  are  carried  to  the  ledger  accounts  as  follows : 

June  15  Howard  Co.,  Plumbing,  No.  862 $346.50 

§210.     (38)  Fire  Insurance,  etc.     (Dr.  $711.28) 
(39)  Mortgage  Insurance      (Dr.  $283.75) 

The  first  of  these  accounts  represents  the  amount  paid 
by  the  concern  for  insurance  on  its  own  property  against 


ANALYSIS  OF  A  TYPICAL  TRIAL  BALANCE 


235 


fire  and  tornado  and  on  rents.  Insurance  paid  on  con- 
tracts should  be  charged  direct  to  the  various  purchasers. 
The  second  account  represents  cash  paid  by  the  concern  for 
insurance  on  mortgaged  properties.  The  items  composing 
it  are  charged  to  the  respective  expense  accounts  in  the 
mortgages  receivable  ledger.  It  is  an  asset  of  the  concern 
and  consequently  should  appear  in  its  proper  place  on  the 
balance  sheet. 

When  damages  are  collected  for  insurance  other  than 
against  fire,  the  accounts  to  be  credited  vary;  but  if  the  in- 
surance is  for  rents,  the  amount  paid  by  the  insurance  com- 
pany is,  of  course,  credited  to  Rent  account.  Damage  to 
buildings  caused  by  fire  or  tornado  is  sometimes  repaired  by 
the  insurance  companies,  or  an  amount  agreed  upon  may 
be  paid  in  cash.  In  the  first  case,  no  entry  is  required  on 
the  books  beyond  a  memorandum  in  the  rent  sub-ledger 
stating  the  facts.  In  the  second  case,  if  repairs  have  been 
made  by  the  concern,  the  cost  of  them  would  naturally  be 
charged  to  Repairs  account,  and  the  amount  received  from 
the  insurance  company  should  be  credited  to  the  same  ac- 
count. 

In  the  event  of  total  loss,  where  the  property  is  owned 
by  the  concern  and  is  not  involved  in  any  time  sale,  the 
insurance  received  is  credited  to  Property  account;  but  if 
the  property  is  subject  to  a  time  sale,  it  must  be  credited  to 
the  account  of  the  purchase,  i.e.,  either  to  the  contract  or 
to  the  principal  of  the  mortgage.  If  any  arrangement  is 
made  with  the  purchaser  to  allow  him  the  use  of  this  money 
for  the  purpose  of  rebuilding,  all  amounts  so  advanced 
should  be  debited  to  the  same  account  as  received  the 
credit. 

In  cases  where  the  number  of  total  losses  is  large,  it  is 
advisable  to  open  a  special  insurance  account,  to  which  are 
credited  all  amounts  collected  for  losses. 


236 


REAL    ESTATE    ACCOUNTS 


§211.     (40)  Interest  Earned      (Cr.  $9,840) 
(41)  Interest  Paid     (Dr.  $4,640) 

These  accounts  afford  another  example  of  the  advis- 
ability of  keeping  two  ledger  accounts  for  items  not  infre- 
quently kept  in  one  account.  "Interest  Earned"  is  credited 
with  the  interest  charged  to  the  general  contracts,  and  with 
sundry  interest  which  may  be  collected  but  which  is  not 
chargeable  to  "Overdue  Mortgage  Interest  Receivable." 

The  "Interest  Paid"  covers  all  interest  paid  by  the  con- 
cern on  loans,  contracts  payable,  etc.,  with  the  exception  of 
interest  on  mortgages  payable.  By  keeping  two  separate 
accounts,  the  trial  balance  will  always  show  how  this  im- 
portant feature  of  the  business  is  running. 

§212.     (42)  Mortgage  Interest  Payable      (Dr.  $11,120) 
(43)   Overdue  Mortgage  Interest  Payable 

(Cr.  $120) 

These  two  accounts  receive  all  entries  relating  to  interest 
on  mortgages  payable,  the  form  of  entry  appearing  in  §  134. 
Account  No.  43  shows  that  there  is  overdue  $120  of  inter- 
est, which  is  payable  by  the  concern.  The  "Mortgage  In- 
terest Payable"  is  chargeable  direct  to  the  Profit  and  Loss 
account,  while  the  "Overdue  Interest"  appears  in  the  bal- 
ance sheet  as  a  liability. 

§  213.     (44)  Mortgage  Interest  Receivable     (Cr.  $2,400) 
(45)  Overdue  Mortgage  Interest  Receivable 

(Dr.  $1,178.10) 

These  items  are  similar  to,  but  in  their  nature  the  re- 
verse of,  accounts  Nos.  42  and  43. 

§214.    (46)  Interest  Unearned      (Cr.  $3,529.82) 

This  account  is  described  in  §  136  et  seq.,  and  refers  to 
cases  where  interest  is  included  in  the  principal  of  "Mort- 


ANALYSIS  OF  A  TYPICAL  TRIAL  BALANCE 


237 


gages  Receivable"  and  "Contracts."  The  method  of  de- 
termining the  amount  which  has  been  really  earned  is  simi- 
lar to  that  applied  to  the  Gain  on  Sales  account  (see  Chap- 
ter XX).  In  the  case  of  the  account  appearing  on  the  trial 
balance,  it  was  found  that  $1,400.08  had  been  earned,  and 
this  amount  is  carried  into  the  Profit  and  Loss  account, 
the  remainder  forming  one  item  of  the  profits  in  reserve. 

§215.     (47)  Judgments     (Dr.  $925) 

This  account  represents  an  amount  due  from  a  con- 
tractor who  failed  to  carry  out  his  agreements.  Suit  was 
instituted  and  a  judgment  obtained,  which  is  of  record  and 
which  it  is  believed  will  ultimately  produce  the  amount  of 
the  debt. 

§  216.    Kingslake  Accounts 

(48)  Contracts,  Dr.  $61,799.88 

(49)  Purchase  (§217),  Dr.  1,272.11 

(50)  Gains  (§218),  Cr.  106,902.00 

(51)  Expense  (§  219),  Dr.  83,370.60 

(52)  Lots  (§  217),  Dr.  75T-90 

(53)  Commissions    (§220),       Dr.  461.40 

(54)  Owner,  Dr.  11,000.00 

These  accounts  represent  a  rather  complicated  purchase 
in  which  the  concern  bought  a  tract  of  about  12,000  acres, 
a  part  of  which  was  waste  land,  such  as  swamps,  etc.  The 
tract  was  divided  into  ten-acre  lots,  and  it  was  agreed  that 
half  the  gross  receipts  should  go  to  the  owner  until  he  had 
received  $4  an  acre,  after  which  the  concern  was  to  reim- 
burse itself  for  all  expense  incurred  in  connection  with  the 
land;  any  further  receipts  to  be  divided,  one-fourth  going 
to  the  owner  and  three-fourths  to  the  concern.  The  tract 
was  developed  several  years  prior  to  the  taking  of  the  pres- 
ent trial  balance  and  practically  all  of  it  was  sold,  the  total 


238          REAL  ESTATE  ACCOUNTS 

available  acreage  being  7,500  acres;  the  remaining  acreage 
consisting  of  roads  and  unsalable  land.  An  examination  of 
the  Contracts  account  showed  that  all  cancellations  had  been 
made  and  that  the  balance  represented  "live"  contracts. 

§217.    (49)  Kingslake  Purchase     (Dr.  $1,272.11) 

(52)  Kingslake  Lots  (Dr.  $751.90) 
This  account  represents  the  cost  of  adjoining  land  which 
the  concern  thought  it  wise  to  buy  and  for  which  it  paid  in 
cash  upon  receiving  a  deed.  As  this  land  is  included  in  the 
general  plat,  it  seemed  most  convenient  to  carry  it  in  this 
manner.  Account  No.  52,  Kingslake  Lots,  is  also  a  real  es- 
tate account  and  represents  the  cost  of  a  number  of  resi- 
dence lots  which  were  platted  from  a  part  of  this  second 
purchase.  Both  accounts  Nos.  49  and  52  are  therefore  real 
estate  accounts  and  are  carried  out  in  that  column. 

§218.    (50)  Kingslake  Gains     (Cr.  $106,902) 

It  will  be  noticed  that  the  gains  are  larger  than  the  con- 
tracts outstanding.  This  is  accounted  for  by  the  fact  that, 
during  previous  periods,  no  part  of  the  Gains  account  had 
been  carried  to  Profits,  but  was  held  in  reserve  on  account 
of  the  heavy  expense  account.  This  gain  is  therefore  on 
all  sales  made  to  this  date,  while  the  Contracts  account  has 
been  continuously  reduced  by  the  monthly  payments  of 
purchasers.  The  method  of  determining  and  dividing  these 
gains  is  shown  in  §  219. 

§219.    (51)  Kingslake  Expense     (Dr.  $83,370.60) 

The  balance  of  this  account  was  so  large  that  it  called 
for  special  examination.  It  was  found  that  all  the  items 
were  for  expenditures  covered  by  agreements,  under  which 
they  are  repayable  to  the  concern.  In  the  case  of  one  item 
of  $11,000,  necessary  to  perfect  the  title,  the  vendor  being 


ANALYSIS   OF  A  TYPICAL  TRIAL   BALANCE       239 

short  of  funds,  the  concern  had  paid  it  under  a  separate 
agreement  that  it  was  to  be  deducted  from  the  purchase 
price.  As  it  was  desired  to  dispose  of  the  Expense  account 
as  quickly  as  possible,  the  following  journal  entries  were 
made  : 

Kingslake  Owner  ........................  $11,000.00 

To  Kingslake  Expense  .............  $11,000.00 

For  cost  of  perfecting  title,  chargeable 
to  the  owner. 

Kingslake  Gains  .........................  $55,163.89 

To  Kingslake  Expense  .............  $55,163.89 

To  charge  Gains  account  with  items  of 
expense  which  prove  to  be  uncollectible. 

It  will  be  seen  that  the  above  entry  properly  disposes  of 
the  expense  by  reducing  the  profits  on  this  tract.  An 
analysis  was  then  made  of  the  sub-ledger  trial  balance  and 
it  was  found  that  the  original  amount  of  outstanding  con- 
tracts, including  541  lots,  was  $132,901.50;  and  that  the 
average  profit  per  lot  was  $205.66.  The  unearned  "Gain 
on  Sales,"  therefore,  in  round  figures  was  as  follows  : 

X  54i  X  $205-66  =  $51,738.1  1 


$132,900 

Therefore,  $55,163.89  was  earned  ;  and  instead  of  carry- 
ing this  into  Profit  and  Loss,  it  was  deducted  from  the  ex- 
penses which  were  thereby  reduced  to  $17,206.71,  which 
amount  was  allowed  to  stand  as  a  real  estate  expenditure  to 
be  deducted  from  next  year's  earned  profits. 

§220.    (53)  Kingslake  Commissions     (Dr.  $461.40) 

This  amount,  being  a  part  of  the  expenses  chargeable 
against  the  property,  was  written  off  to  Profit  and  Loss 
account. 


240 


REAL    ESTATE   ACCOUNTS 


§  221.    Lad  ore  Accounts 

(55)  Contracts,  Dr.  $30,506.00 

(56)  Purchase,  Dr.  38,840.00 

(57)  Gains,  Cr.  25,470.00 

(58)  Expense,  Dr.  4,229.04 

(59)  Commissions  (§222),  Cr.  1,580.00 

(60)  Town  Lots  (§  223),  Dr.  10,560.00 

This  group  of  accounts  shows  the  transactions  relating 
to  a  subdivision  owned  by  the  concern.  It  consists  of  five 
separate  purchases,  each  of  which  was  originally  carried  in 
the  same  manner  as  the  Dawes  account  (§  197).  Upon 
closing  the  books,  these  were  consolidated  and  it  was  found 
that  693  acres  had  been  bought  at  a  total  cost  of  $51,833. 

These  various  purchases  were  surveyed,  platted,  and  di- 
vided into  567  lots  of  about  one  acre  each,  the  difference 
being  accounted  for  by  streets,  parks,  etc.  A  part  of  the 
tract  was  subdivided  into  181  city  lots  50  X  100  feet,  known 
as  "Ladore  Townsite."  The  estimated  cost  of  these  lots  was 
$2,250,  which  was  deducted  from  the  total  cost,  leaving  the 
net  cost  of  the  one-acre  lots  at  $49,583,  or  $87.45  a  lot.  In 
calculating  profits,  etc.,  this  in  round  figures  is  called  $90. 

The  balance  of  Expense  account,  $4,229.04,  was  found 
to  cover  cost  of  road-making  and  other  permanent  im- 
provements. Further  improvements  were  contemplated 
which,  it  was  estimated,  would  cost  $2,500,  making  a  total 
sum  of  $6,729.04.  As  it  was  desired  that  the  total  cost  of 
these  expenses  should  be  added  to  the  purchase  price  of  the 
land,  the  following  journal  entry  was  made: 

Ladore   Purchase $6,729.04 

To  Ladore  Expense $6,729.04 

This  being  posted  to  the  Expense  account,  left  a  credit 
balance  of  $2,500  as  a  reserve  for  future  expenditures. 


ANALYSIS  OF  A  TYPICAL  TRIAL  BALANCE 


241 


These  operations  brought  the  cost  up  to  $56,312.04,  or 
$99.32  a  lot,  which  is  called  $100  when  calculating  profits. 
An  analysis  of  the  sub-ledger  shows  that  185  lots  were  sold, 
yielding  an  average  profit  of  $102  per  lot.  As  the  original 
amount  of  these  sales  was  $37,370,  the  unearned  profits  are 
as  follows: 

$30,506  x  igs 
$37,370 

This  amount  deducted  from  the  gain  of  $25,470  leaves 
$10,066  to  be  carried  to  Profit  and  Loss. 

§222.    (59)  Ladore  Commissions      (Cr.  $1,580) 

These  are  commissions  promised  to  agents  who  have 
made  time  sales.  The  liability  for  them  is  therefore  con- 
tingent upon  those  sales  being  completed. 

§  223.    (60)  Ladore  Town  Lots     (Dr.  $10,560) 

At  the  beginning  of  the  sale  of  Ladore  lots,  the  concern 
offered  to  give  a  townsite  lot  to  each  purchaser  of  an  acre 
lot.  This  arrangement  is  not  uncommon  and  calls  for 
special  entries  on  the  books.  The  most  convenient  method 
is  to  add  the  cost  of  the  free  lots  to  the  cost  of  the  purchased 
lots  and  deduct  the  sum  from  the  price  paid  by  the  purchaser. 

It  is  important  that  the  record  of  lots  selected  to  be  so 
given  away  should  be  clearly  marked  on  the  plats;  and,  al- 
though the  deed  is  not  given  until  all  the  purchase  money  is 
paid,  the  records  should  be  very  clear  in  showing  that  these 
lots  are  reserved  and  therefore  cannot  be  included  as  an 
asset.  The  form  of  journal  entry  would  be  as  follows : 


Ladore  Contracts 

To  Ladore  Purchase  .. 
Town  Lots. 
Gains  . 


242          REAL  ESTATE  ACCOUNTS 

In  addition  to  the  181  townsite  lots  above  mentioned, 
over  227  lots  were  purchased  which  had  already  been 
platted,  giving  a  total  of  408  lots  at  a  cost  of  $11,114, 
which,  in  calculating  profits,  is  figured  at  $30  a  lot. 

§224.    (6 1 )  Life  Insurance     (Dr.  $2,120) 

It  has  been  the  custom  of  late  years  with  many  owners, 
especially  in  connection  with  subdivision  properties,  to  guar- 
antee that,  in  event  of  the  decease  of  any  purchaser  during 
the  life  of  a  contract,  the  owner  will  convey  to  the  estate  of 
the  deceased  the  property  covered  by  the  contract.  This  is 
loosely  described  as  "Life  Insurance,"  although  the  account 
actually  represents  the  unpaid  balances  on  contracts  of  pur- 
chasers who  have  died  since  the  books  were  last  closed.  The 
entire  amount  is  chargeable  direct  to  Profit  and  Loss  as  an 
expense,  there  being  no  advantage  in  complicating  entries 
by  keeping  a  separate  life  insurance  account  for  each  sub- 
division. 


CHAPTER  XXVI 

ANALYSIS    OF    A    TYPICAL    TRIAL    BALANCE 

(Continued) 

§  225.    Malvern  Hill  Accounts 

(62)  Contracts,  Dr.  $37,467.00 

(63)  Purchase,    Dr.     34,057.00 

(64)  Gains,          Cr.     23,022.00 

(65)  Expense,     Dr.  7.25 

This  group  of  accounts  represents  a  subdivision  which 
was  acquired  in  a  manner  different  from  any  of  those  here- 
tofore discussed.  The  Malvern  Hill  Land  Company  bought 
a  considerable  tract  which  was  platted  into  town  lots  and 
placed  on  sale.  A  number  of  lots  were  sold  and  contracts 
given,  some  of  which  were  paid  up  and  deeds  given  to  the 
purchasers.  As  some  members  of  the  Malvern  Hill  Com- 
pany wished  to  retire,  that  company  offered  its  entire  hold- 
ings, consisting  of  unsold  lots  and  open  contracts,  to  the 
concern  whose  trial  balance  is  under  discussion,  which 
bought  them  for  a  lump  sum.  When  analyzed,  it  is  found 
that  the  purchase  price  consisted  of  two  items,  one  of  which 
was  the  aggregate  balances  of  the  open  contracts  bought, 
and  the  other  the  cost  of  the  unsold  lots.  As  time  went  on, 
a  number  of  the  original  contracts  were  cancelled,  and  the 
question  arose  as  to  whether  the  property  thus  acquired 
should  be  taken  back  on  the  books  at  the  balance  of  the 
contract  (which  was  really  the  cost  price  to  the  concern), 
or  whether  they  should  be  taken  in  at  the  average  cost  per 
lot,  the  market  value  of  one  of  these  lots  being  the  same 
as  that  of  an  adjacent  lot  which  had  not  been  sold. 

243 


244 


REAL    ESTATE    ACCOUNTS 


It  was  decided  that,  in  the  case  of  a  cancelled  contract, 
the  land  should  be  taken  in  at  the  balance  remaining  unpaid 
on  the  contract,  and  this  practice  was  continued  for  a  year 
or  more.  The  auditors  then  pointed  out  the  confusion  which 
was  arising  from  having  adjacent  lots  with  widely  diver- 
gent cost  prices,  and,  when  the  balance  was  prepared,  a  list 
of  all  unsold  lots  was  made.  This  showed  that  there  were 
1,392  of  these  lots  and  that  they  had  cost  $34,057.72,  an 
average  of  about  $25  a  lot.  Instructions  were  accordingly 
given  that,  in  the  event  of  any  contract  being  cancelled, 
whether  made  originally  by  the  Malvern  Hill  Company  or 
by  the  concern,  the  entry  therefor  should  be  the  following : 


Malvern  Hill  Lots  (cost  price  of  a  lot,  $25) 

Malvern  Hill  Gain 

To  Malvern  Hill  Contracts.. 


It  will  probably  be  admitted  that  in  a  contract  of  this 
description  where  the  number  of  lots  is  large,  this  is  a  safe 
and  conservative  plan  to  follow,  although  objection  may  be 
raised  as  to  its  technical  accuracy.  In  this  particular  case 
it  was  found  that  the  amount  of  the  contracts  assumed  by 
the  concern,  of  which  the  balances  were  $37,467,  had 
originally  been  $88,090 ;  that  they  comprised  500  lots,  which, 
taken  on  at  a  cost  of  $25  each,  would  then  show  an  average 
profit  of  $150  per  lot.  These  figures  show  that  there  are  un- 
earned profits  amounting  to  $32,218,  which  is  more  than 
the  total  amount  left  in  the  Gain  on  Sales  account,  the  dis- 
crepancy having  been  caused  by  the  fact  that  many  of 
the  lots  were  originally  bought  at  the  face  value  of  the 
contract. 

§  226.    Malvern  Hill  Determination  of  Profits 

As  the  existing  contracts  were  more  than  half  paid  up, 
the  question  then  arose  as  to  what  profit  should  be  car- 


ANALYSIS  OF  A  TYPICAL  TRIAL  BALANCE 


245 


ried  to  Profit  and  Loss,  and  the  following  plan  was  adopted 
as  a  compromise,  recourse  being  had  to  the  third  method  of 
calculation  described  in  §  173.  In  this  case  the  unearned 
profit  was  represented  by  the  following  fraction: 

-— — -  X  $23>022  (balance  of  Gains  account)  =  $9,790 
$88,090 

This  would  yield  an  unearned  profit  of  $9,790  and  an 
earned  profit  of  $13,229.  From  this  amount  there  was  de- 
ducted 25%  as  a  reserve,  i.e.,  $3,307.25;  and  $9,922  was 
carried  to  Profit  and  Loss.  The  selection  of  25%  as  the 
margin  of  safety  was,  of  course,  arbitrary,  but  the  examples 
given  in  §  145  will  show  that  it  is  a  safe  margin.  Technical 
objections  may  be  raised  as  to  the  accuracy  of  this  method, 
and  it  may  be  claimed  that  the  Gains  account  should  have 
been  increased  to  bring  it  up  to  $32,218,  the  difference  being 
charged  against  Profit  and  Loss.  However,  inasmuch  as 
the  contracts  have  been  more  than  half  paid,  it  was,  in  this 
instance,  considered  more  equitable  to  follow  the  plan  out- 
lined above. 

§227.    (66)  Manning,  R.      (Cr.  $212) 

Mr.  Manning  is  a  customer  who  owns  a  number  of 
houses  from  which  the  concern  collects  rent,  making  monthly 
returns  to  him.  $212  represents  the  net  balance  of  rents 
for  the  last  month,  which  has  not  yet  been  paid  to  him, 
and  which  is  therefore  carried  among  the  accounts  pay- 
able. 

§228.     (68)  Mortgages  Payable     (Cr.  $257,422.30) 
(69)  Mortgages  Receivable      (Dr.  $45,000) 

The  nature  of  these  accounts  has  been  described  in  §  52 
and  Chapter  XVI  and  the  details  of  the  total  are  shown  in 


246          REAL  ESTATE  ACCOUNTS 

a  schedule  accompanying  the  balance  sheet,  giving  the  fol- 
lowing particulars  of  each  mortgage : 

Record  number 
Name  of  the  holder 
Property  covered 
Date  due 
Amount 

§229.    (67)  Mortgage  Deficiency  Account      (Cr.  $2,000) 
(70)  Mortgages  in  Settlement     (Dr.  $5,250) 

These  accounts  represent  mortgages  receivable  to  the 
amount  of  $5,250,  which  are  in  course  of  foreclosure  and  on 
which  it  is  expected  that  a  loss  of  $2,000  will  be  sustained 

(§121). 

§230.    (71)  Office  Furniture      (Dr.  $3,200) 
(72)  Office  Fixtures     (Dr.  $3,156) 

These  accounts  represent  the  actual  cost  of  the  articles 
described,  less  an  annual  depreciation  at  the  rate  of  15% 
on  the  outstanding  balances.  The  amount  of  depreciation 
is  frequently  a  matter  of  argument  between  the  owners  and 
the  auditors.  Where  the  item  covers  such  articles  as  type- 
writers, adding  machines,  etc.,  probably  25%  would  be  a 
fair  proportion ;  on  the  other  hand,  where  the  principal  items 
are  solid  fixtures,  safes,  etc.,  15%  seems  to  be  a  reasonable 
amount. 

§23i-    (73)  Options  Granted     (Cr.  $5,200) 
(74)  Options  Held      (Dr.  $3,400) 

"Options  Granted"  are  described  in  §  130.  A  state- 
ment accompanies  the  balance  sheet,  giving  the  number, 
name,  property,  and  amount  of  each  such  option.  Inas- 
much as  they  have  not  yet  been  turned  into  contracts  and 


ANALYSIS  OF  A  TYPICAL  TRIAL  BALANCE 


247 


charged  to  Real  Estate,  this  amount  is  carried  in  the  bal- 
ance sheet  as  a  separate  liability. 

"Options  Held"  are  options  on  real  estate  obtained  by 
the  concern  and  are  included  in  the  "Real  Estate"  column, 
as  it  is  expected  that  each  of  them  will  be  exercised  and  that 
the  amount  paid  for  the  option  will  be  deducted  from  the 
purchase  price  to  be  paid  for  the  respective  properties.  In 
the  event  of  any  option  lapsing,  the  amount  paid  therefor  is 
chargeable  directly  to  Profit  and  Loss. 

§  232.    Parkville  Accounts 

(75)  Contracts,  Dr.  $18,842.00 

(76)  Purchase,  Cr.       8,725.00 

(77)  Gains,  Cr.       9,796.00 

(78)  Expense,  Dr.          783.20 

(79)  Commissions,  Dr.          275.00 

This  group  of  accounts  refers  to  a  tract  "which  was 
handled  under  a  selling  contract.  The  entire  tract  consisted 
of  240  lots,  to  be  sold  at  prices  shown  in  a  schedule  at- 
tached to  the  original  agreement.  The  concern  had  the  ex- 
clusive sale,  was  to  pay  all  expenses  attached  to  the  selling, 
and  was  allowed  to  retain  all  profits  made  above  the 
schedule  prcies. 

The  tract  lay  in  a  town  several  hundred  miles  from  the 
home  office  and  the  subdivision  was  therefore  managed 
through  a  local  office,  where  detailed  accounts  of  the  con- 
tracts and  sales  were  well  and  accurately  kept.  Until  a  few 
months  before  the  date  of  this  trial  balance,  no  sub-ledgers 
for  these  contracts  had  been  kept  in  the  main  office;  and 
upon  the  auditors'  comparing  the  balance  of  outstanding 
contracts,  as  shown  on  the  general  ledger,  with  a  special 
report  from  the  sub-office,  it  was  found  that  the  general 
ledger  balance  was  some  $10,000  in  excess  of  the  sub-ledger 
balance  in  the  branch  office.  When  the  matter  was  investi- 


248  REAL    ESTATE   ACCOUNTS 

gated,  it  was  found  that  a  number  of  reports  had  failed  to 
reach  the  bookkeeper,  and  had  therefore  not  been  placed 
upon  the  general  ledger. 

For  several  years  past,  the  auditors  had  recommended 
that  a  duplicate  sub-ledger  be  kept  in  the  main  office,  and 
that  weekly  detailed  reports  be  rendered  from  the  branch 
office  to  keep  up  this  duplicate  set  of  books,  which  could 
then  be  compared  periodically  with  the  branch  office  books 
and  the  accuracy  of  both  insured.  When  this  serious  dis- 
crepancy was  discovered,  the  concern  agreed  to  adopt  their 
auditors'  suggestions,  and  since  that  time,  such  troubles 
have  not  appeared.  Upon  closing  the  books  it  was  necessary 
to  make  the  following  journal  entry: 

Parkville   Purchase $4,775.00 

Parkville  Gains 5>775-°o 

To  Parkville  Contracts $10,004.95 

"    Parkville  Profits 545-Q5 

This  brought  the  balances  of  the  outstanding  contracts 
down  to  $8,837.05.  An  analysis  showed  the  original 
amount  of  these  contracts  to  have  been  $20,320,  while  the 
original  profit  had  been  $10,495.  The  unearned  profits  were 
therefore  $4,564.18,  which  was  slightly  more  than  the 
amount  left  in  the  Profits  account.  The  difference  of 
$1.87  was  then  charged  against  the  Profit  and  Loss 
account. 

It  will  be  noted  that  the  Purchase  account  is  here  a  credit 
account  and  represents  a  liability  contingent  upon  the  com- 
pletion of  the  contracts  by  the  purchasers. 

§  233.     (80)  Petty  Cash      (Dr.  $75) 

The  method  of  keeping  petty  cash  is  described  in  §  14. 
$75  was  the  amount  originally  placed  in  the  hands  of  the 
cashier. 


ANALYSIS  OF  A  TYPICAL  TRIAL  BALANCE 


249 


§234.     (81)  Postage     (Dr.  $725) 

This  title  explains  itself,  it  being  understood  that  this 
amount  is  the  current  office  postage  and  does  not  include 
the  amount  paid  for  sending  out  circulars  in  quantity,  which 
should  be  charged  to  Advertising.  It  is  an  excellent  prac- 
tice to  keep  a  mailing  book,  in  which  is  entered  each  letter 
mailed,  with  the  date,  name,  and  amount  of  postage.  This 
not  only  affords  a  check  on  the  stamps,  but  gives  a  useful 
record  of  letters  sent  to  the  mail ;  also  if  the  postage  is  to  be 
divided  among  different  concerns,  departments,  or  indi- 
viduals, this  book  affords  a  ready  means  of  doing  so. 

§  235.     (82)  Profit  and  Loss      (Cr.  $75,405.10) 

The  amount  shown  by  this  account  is,  of  course,  the 
balance  of  Profit  and  Loss  carried  over  from  the  last  bal- 
ance sheet.  Some  bookkeepers  have  a  habit  of  making  en- 
tries in  this  account  from  time  to  time  during  the  fiscal 
period.  This  is  not  a  good  practice,  the  chief  objection 
being  that  it  affords  an  opportunity  to  hide  entries  or  to 
distract  notice  therefrom.  Any  entry  showing  a  loss  or 
gain  should  be  posted  to  some  active  account  included  in  the 
"Earnings"  or  "Expense"  schedule  (§  82).  Entries  to 
Profit  and  Loss  during  the  fiscal  period  tend  also  to  confuse 
an  analysis  of  the  trial  balance. 

§236.    (83)  Profits     (Cr.  $8,242.10) 

The  nature  of  this  account  and  the  method  of  keeping 
it  are  explained  in  §  82.  As  it  represents  profits  already 
earned,  the  entire  amount  is  transferred  to  the  credit  of 
Profit  and  Loss. 

§  237.    Prospect  Park  Accounts 

(84)  Contracts,  Dr.  $1,158.98 

(85)  Gains,          Cr.      1,576.00 


250 


REAL    ESTATE    ACCOUNTS 


(86)  Purchase,    Dr.     3,402.00 

(87)  Expense,     Dr.          85.00 

This  group  of  accounts  relates  to  subdivision  property 
owned  by  the  concern,  the  value  of  the  unsold  part  being 
carried  in  the  above  Purchase  account.  At  the  time  of 
making  this  purchase,  the  concern  agreed  that  one  T.  Rind- 
ers  (who  participated  in  making  the  purchase)  should  have 
one-third  of  the  profits  as  they  were  realized.  His  part  of 
the  account  is  treated  more  fully  later  under  accounts  Nos. 
91,  92.  The  analysis  of  the  sub-ledger  shows  that  the  open 
contracts,  on  which  the  balances  are  $1,158.98,  cover  14 
lots,  which  were  originally  sold  for  $2,195  and  which  cost 
the  concern  $63  each.  From  these  figures,  it  is  evident  that 
the  average  selling  price  was  about  $157,  and  the  net  profit 
$94  per  lot. 

With  these  facts,  the  unearned  profit  is  as  follows : 

^H  X  14  X  $94  =  $694.87 
$2,195 

If  we  deduct  this  amount  from  the  balance  of  the  Gains 
account  ($1,576),  it  is  found  that  the  earned  profits  are 
$881.13,  of  which  two-thirds  ($587.42)  is  credited  to  Profit 
and  Loss;  one-third  ($293.71)  is  credited  to  account  No. 
91  (Rinders,  T.).  $694.87  remains  in  the  Reserve  Profits. 
The  Expense  account  is  carried  to  the  debit  of  Profit  and 
Loss.  The  Purchase  account  is  verified  by  ascertaining 
that  there  remained  unsold  54  lots,  which,  at  $63  each, 
amount  to  $3,402. 

§  238.    (88)  Real  Estate     (Dr.  $473,130.13) 

This  account  represents  (as  explained  in  §64)  the  actual 
cost  of  all  real  estate  owned  by  the  concern,  except  such 
subdivision  tracts  as  are  carried  in  separate  accounts  as  for 
example,  "Prospect  Park  Purchase."  In  making  up  the 


ANALYSIS  OF  A  TYPICAL  TRIAL  BALANCE 


251 


balance  sheet,  a  schedule  of  this  real  estate  should  be  pre- 
pared giving  the  book  number  of  each  piece,  sufficient  de- 
scription to  identify  it,  and  the  value  at  which  it  is  carried 
on  the  books.  It  is  to  be  noted  that  the  amount  shown  in 

the  trial  balance $473,130.13 

is  reduced  in  the  balance  sheet  by  the  follow- 
ing items : 

Brick-yard  Royalties  (account  No. 

6)  $1,300.00 

Stumpage   (account  No.   107) ....     6,250.00         7,550.00 


Leaving  a  balance  in  Real  Estate  of . . $465,580.13 

§239.     (89)  Rent  Account     (Cr.  $5,780) 

The  Rent  account  is  described  in  Chapter  XIV.  The 
balance  here  shown  represents  the  rents  collected  during  the 
period  from  properties  owned  by  the  concern,  and  is  there- 
fore to  be  credited  to  Profit  and  Loss. 

§240.     (90)  Repairs    (Dr.  $1,245.60) 

This  is  an  offset  account  to  account  No.  89,  and  repre- 
sents the  total  amount  spent  by  the  concern  on  repairs  to  its 
property  during  the  period.  The  total  amount  is  charged  to 
Profit  and  Loss.  It  is  the  practice  of  some  offices  to  carry 
the  rent  and  repairs  in  one  account  in  the  ledger.  The  bal- 
ance of  such  account  will  therefore  show  the  net  rents  col- 
lected. Experience  has  shown,  however,  that  it  is  advan- 
tageous to  carry  these  accounts  separately,  as  the  monthly 
trial  balance  will  then  exhibit  the  exact  amount  collected 
and  the  exact  amount  spent.  These  separate  amounts  are 
much  more  important  than  is  the  difference  between  them, 
and  the  latter  figure  can  very  readily  be  obtained  when  the 
separate  balances  are  shown. 


252 


REAL  ESTATE  ACCOUNTS 


§241.     (91)  Rinders,  T.      (Dr.  $280) 

(92)  Rinders,  T.,  Reserve      (Cr.  $525.33) 

These  accounts  are  opened  in  connection  with  the  Pros- 
pect Park  property,  accounts  Nos.  84  to  87.  As  stated,  Mr. 
Rinders  is  to  be  credited  with  one-third  of  the  profits  as 
the  concern  makes  them.  It  is  shown  above  that  the  average 
selling  price  was  $157  and  yielded  an  average  gross  profit 
of  $94.  The  form  of  journal  entry  bringing  sales  of  this 
property  on  the  books,  is  as  follows : 

Prospect  Park  Contracts $157.00 

To  Prospect  Park  Purchase $63.00 

"      Gains 62.67 

"    Rinders,  T.,  Reserve 3!-33 

It  will  be  seen  that,  by  opening  this  Rinders'  reserve 
account,  there  is  shown  a  liability  of  the  concern  for  the 
portion  of  the  profits  due  him.  Such  entries  had  been  made 
in  the  past,  and  at  the  last  closing  of  the  books  one-third 
of  the  profits  earned  had  been  debited  to  this  account,  leav- 
ing $525.33  still  unearned.  There  is  now  charged  to  this 
account  the  amount  already  shown  as  Rinders'  share  of  the 
unearned  profits  ($293.71),  which  is  brought  in  by  the 
following  entry : 

Prospect  Park  Gains $293.71 

To  Rinders,  T $293.71 

For  amount  of  unearned  profits  to  date. 

This  entry  will  change  the  balance  of  account  No.  91 
into  a  credit  account  of  $13.71,  which  is  carried  into  "Ac- 
counts Payable"  column. 

The  principle  of  the  above  account  is  simple:  The  re- 
serve account  is  credited  with  one-third  of  the  profits  as 
each  sale  is  made,  and  is  debited  with  the  same  proportion 
of  the  profits  as  they  are  earned.  The  balance,  therefore, 


ANALYSIS   OF   A   TYPICAL   TRIAL   BALANCE 


253 


shows  a  liability  to  Mr.  Rinders  which  is  contingent  upon 
the  contracts  being  carried  out.  As  these  profits  are 
realized,  Rinders'  personal  account  is  credited  with  "Profits 
Earned"  and  debited  with  the  sundry  cash  advances  made 
to  him  from  time  to  time ;  the  balance  thus  shows  the  cash 
due  or  excess  payment  made  him.  If  instead  of  merely  an 
interest  in  the  profits,  Rinders  had  also  had  an  interest  in 
the  title  of  the  land,  the  procedure  would  have  been  some- 
what different;  e.g.,  if  "Real  Estate"  showed  the  full  value 
of  the  lot,  it  would  be  necessary  to  open  another  credit  ac- 
count for  Rinders  as  owner,  crediting  him  with  his  interest, 
and  entries  regarding  the  profits  would  probably  be  similar 
to  those  indicated  above. 

§242.     (93)  Robinson,  J.,  Trustee     (Cr.  $210,418.52) 

This  is  one  of  the  various  trust  accounts  so  often  found 
on  the  books  of  real  estate  concerns.  In  this  particular  case 
the  concern  had  acquired  a  large  number  of  properties,  as- 
suming the  mortgages  outstanding  against  them  —  many 
of  wrhich  were  overdue.  Mr.  Robinson  entered  into  an 
agreement  with  the  concern  that,  in  order  to  facilitate  the 
financing  of  the  concern,  he  would  buy  certain  of  these 
mortgages  at  their  face  value  with  interest  to  the  date  of 
his  purchase,  and  would  treat  the  total  of  the  sum  so  spent 
as  one  account,  on  which  he  would  expect  6%  interest, 
payable  half-yearly.  All  these  mortgages  had  been  entered 
in  the  mortgages  payable  ledger  as  having  been  assumed  by 
the  concern,  and  a  notation  was  made  on  the  account  for 
each  mortgage  bought  by  Mr.  Robinson  of  the  fact  that  it 
was  assigned  to  him,  a  journal  entry  being  made  as 
follows: 

Mortgages   Payable $ 

Mortgage  Interest  Payable 

To  J.  Robinson,  Trustee $ 


254 


REAL    ESTATE   ACCOUNTS 


These  remarks  are,  of  course,  applicable  only  to  this  par- 
ticular form  of  trusteeship.  Another  common  form  is  where 
a  trustee  advances  a  certain  amount  of  money,  which  is 
credited  to  him  and  which  is  to  be  repaid  out  of  the  pro- 
ceeds of  the  sale  of  certain  lands.  In  such  cases  he  should 
be  credited  with  the  amounts  advanced,  and  it  is  usually 
well  to  open  two  accounts  somewhat  similar  to  Nos.  91  and 
92,  in  one  of  which  the  trustee  receives  credit  for  the  whole 
amount,  and  in  the  other  he  is  credited  with  the  amounts 
as  they  become  payable  to  him  and  is  charged  with  the 
cash  payments  made  on  account  thereof,  the  balance  from 
this  latter  account  being  transferred  periodically  to  the  first 
account. 

§243.    (94)  Salaries      (Dr.  $23,805) 

(106)  Stationery  and  Printing      (Dr.  $472) 

These  accounts  speak  for  themselves,  and  the  entire  bal- 
ance in  each  case  is  carried  direct  to  the  debit  of  Profit  and 
Loss. 

§  244.    South  Bay  Accounts 

(95)  Farm  Contracts,     Dr.  $212,814.00 

(96)  "       Gains,          Cr.     239,657.65 

(97)  "       Purchase,     Dr.       95,580.00 

(98)  Villa    Contracts,    Dr.       32,850.00 

(99)  "       Gains,  Cr.       32,640.00 

(100)  "       Purchase,     Dr.       29,550.00 

(101)  Front  Purchase,  Dr.  19,560.00 

(102)  Expense,  Dr.  32,805.00 

(103)  Commissions,  Dr.  4,750.00 

(104)  Reserve,  Cr.  72,000.00 

These  accounts  refer  to  a  large  tract  of  land  purchased 
by  the  concern  some  years  before,  consisting  of  farming 


ANALYSIS   OF  A  TYPICAL  TRIAL   BALANCE       255 

country,  a  frontage  along  a  main  highway,  and  also  a 
valuable  water  frontage.  The  tract  was  therefore  divided 
into  three  distinct  tracts,  viz. : 

1.  South  Bay  Farms 

2.  Villa  Sites 

3.  Water-Front 

the  original  cost  being  divided  pro  rata  on  the  basis  of  the 
respective  areas.  For  two  or  three  years  considerable  sums 
were  spent  for  road-making,  surveying,  draining,  and  other 
improvements,  and  these,  as  representing  physical  improve- 
ments, had  been  added  to  the  cost  of  the  property  up  to 
the  time  of  the  last  balance  sheet.  The  total  amount  so 
expended  was  divided  among  the  three  subdivisions  in  pro- 
portion to  the  amount  of  work  done  on  each  tract. 

On  the  other  hand,  the  water-front  was  not  developed  in 
any  way,  although  some  improvements  for  making  roads 
through  it  were  added  to  the  original  cost.  As  the  final  im- 
provement of  this  tract  was  likely  to  require  a  great  deal 
of  expensive  work,  such  as  bulkheading,  and  as  the  profits 
from  the  South  Bay  tract  a  year  ago  had  been  considerable, 
$72,000  was  taken  from  the  South  Bay  profits  and  held  in 
reserve  for  future  improvements  of  the  water-front,  none 
of  this  latter  having  been  sold. 

The  contract  accounts  are  carried  into  the  "Contracts" 
column,  and  the  three  purchase  accounts  are  carried  into 
the  "Real  Estate"  column. 

The  Expense  account  ($32,805)  was  considered  care- 
fully and,  as  the  owners  felt  that  the  property  was  now 
fairly  well  established,  it  was  decided  that  about  one-third 
($11,000)  should  be  charged  direct  to  Profit  and  Loss  and 
that  the  remaining  $2 1 ,805  should  be  distributed  as  follows : 

To  Farms  Purchase $12,000 

"    Villa  Site  Purchase 6,000 

"    Water-Front 3,805 


256  REAL    ESTATE   ACCOUNTS 

The  entire  "Commissions"  account  (No.  103)  was 
charged  to  Profit  and  Loss. 

The  Farms  "Gains"  results  were  arrived  at  as  follows: 

The  open  contracts  covered  699  farms,  which  had 
yielded  an  average  profit  of  $392.23,  the  total  original  sales 
having  been  $344,069.  These  figures  showed  an  unearned 
profit  of  $167,269  (which  amount  is  retained  in  the  balance 
sheet)  and  earned  profits  of  $72,388.65. 

The  Villa  contracts  show  that  the  open  contracts  in- 
cluded 221  lots,  which  had  yielded  originally  $34,196,  the 
original  sales  having  been  $40,671.  These  give  the  fol- 
lowing figures: 


X  $34,i96  =  $27,620.14 


$40,671 


which  is  kept  in  the  reserve  profits,  leaving  $5,019.86  to 
be  carried  to  Profit  and  Loss. 

§  245.     (105)  Sperry,  J.  M.     (Dr.  $422) 

These  are  advances  made  to  a  traveling  agent,  and  can 
be  charged  into  Accounts  Receivable. 

§  246.     (107)  Stumpage    (Cr.  $6,250) 

This  account  represents  various  sums  collected  during 
the  preceding  period  as  stumpage  on  timber  lands  owned 
by  the  concern,  each  item  being  credited  on  the  real  estate 
ledger  to  the  particular  tract  involved.  The  total  amount 
is  now  credited  to  Real  Estate  as  being  a  reduction  in  the 
cost  of  the  land.  If  the  value  of  the  land  had  been  divided 
as  indicated  in  §  99,  these  collections  would  have  been  so 
credited  until  they  equalled  the  book  value  of  the  stumpage, 
all  amounts  in  excess  thereof  being  credited  to  Profits 
account. 


ANALYSIS  OF  A  TYPICAL  TRIAL  BALANCE 


257 


§  247.     (108)  Suspense    (Dr.  $750) 

The  uses  to  which  a  suspense  account  can  properly  be 
put  are  many,  and  it  is  usually  necessary  to  have  such  an 
account  on  the  books.  In  this  particular  instance  the  main 
office  had  paid  a  draft  for  $750  made  by  the  sub-office  just 
before  the  closing  of  the  books,  and  the  exact  disposition 
thereof  had  not  been  ascertained. 

§  248.    (109)  Taxes       (Dr.  $398.63) 

This  account  is  carried  direct  to  the  debit  of  Profit  and 
Loss,  as  it  represents  taxes  for  a  past  period. 

§  249.    (no)  Mortgage  Taxes    (Dr.  $308.15) 

This  represents  taxes  paid  for  mortgagors  by  the  con- 
cern, and  is  carried  among  the  assets  on  the  balance  sheet. 

§  250.    Torbay  Heights  Accounts 

(in)  Contracts,  Dr.  $11,283.00 

(112)  Purchase,  Cr.       4,450.00 

(113)  Gains,  Cr.       5,220.00 

(114)  Townley,  J.  R.,  Cr.          470.00 

This  is  a  small  subdivision  property  which  is  handled 
on  a  selling  contract,  the  owner  receiving  $166.66  for  each 
lot ;  50%  of  gross  receipts  being  paid  to  him  from  month 
to  month,  the  concern  paying  all  expenses  and  the  profits 
on  cancellations  being  divided  equally  between  the  owner 
and  the  concern.  In  this  case,  Purchase  account  is  credited 
with  $166  on  each  lot  shown  in  the  usual  way,  and  each 
month  a  journal  entry  is  made  in  the  following  form : 

Torbay  Heights  Purchase $ 

To  Torbay  Heights,  J.  R.  Townley $ 

For   50%   of  the   gross   receipts   during  the 
month  of on  this  property. 


258 


REAL    ESTATE   ACCOUNTS 


Mr.  Townley's  account  is  charged  with  cash  payments 
as  they  are  made  to  him.  The  balance  of  the  Purchase  ac- 
count is  therefore  a  liability  contingent  on  the  completion 
of  the  contracts,  while  Townley's  account  shows  the  actual 
liability  existing  at  any  time,  and  which  at  the  date  of  the 
balance  sheet  amounted  to  $470,  and  is  carried  in  the  "Ac- 
counts Payable"  column. 

There  is  one  particular  complication  in  this  account 
which  does  not  appear  upon  its  face.  Among  the  open  con- 
tracts several  are  included  which  are  really  dead,  but  which 
the  concern  has  not  cared  to  cancel  inasmuch  as  the  terms 
of  the  original  agreement  have  expired  and  they  hope  to 
find  some  other  purchasers  and  thus  realize  their  profit. 

The  analysis  of  the  sub-ledger  shows  that  the  balance 
of  the  open  contracts  represents  in  all  60  lots,  the  average 
selling  price  being  $369.16,  and  the  average  profit  $202.50. 
The  unearned  profit  is  therefore  as  follows : 

2  3  X  6o  X  $202.50  =  $6,189.09 
$22,150 

It  will  be  noticed  that  this  is  a  larger  amount  than  that 
shown  in  the  Gains  account,  but,  in  view  of  the  fact  that 
there  is  a  good  prospect  of  the  concern's  re-selling  the  can- 
celled contracts,  this  amount  is  allowed  to  remain  in  the 
reserve,  no  part  of  it  being  carried  to  Gains. 

§251.    (115)  Treasury  Stock     (Dr.  $22,000) 

It  had  been  the  practice  of  this  particular  concern  dur- 
ing past  years  to  accept  its  own  capital  stock  in  payment 
for  its  real  estate,  and  in  this  way  it  has  recovered  $22,000 
of  the  stock  originally  issued.  This  amount  is  therefore 
carried  in  its  own  account  and  appears  on  the  balance  sheet, 
where  it  is  deducted  from  the  original  issue  of  the  stock. 


ANALYSIS  OF  A  TYPICAL  TRIAL  BALANCE 

§252.     ( 1 16)  Cash— Superintendent     (Dr.  $120) 

This  account  represents  an  amount  of  money  for  cur- 
rent expenses,  placed  in  the  hands  of  the  superintendent  of 
one  of  the  subdivisions,  the  account  on  the  general  ledger 
remaining  unchanged  from  month  to  month.  Such  an  ac- 
count is  best  kept  in  a  manner  similar  to  that  used  for 
petty  cash  (§  14),  except  that  in  this  case  there  are  likely 
to  be  sundry  receipts  from  other  sources,  such  as  the  sale 
of  wood  or  old  lumber,  etc.  The  most  convenient  form  of 
record  is  the  superintendent's  cash  book,  described  in  §  15. 

§253.    (117)  Cash  in  Bank     (Dr.  $7,990.40) 

This  account  represents  balances  in  several  banks,  which 
have,  of  course,  been  verified  by  comparison  of  the  cash 
book  with  the  respective  bank  pass-books.  As  no  cash  ac- 
count is  carried  in  the  ledger  (§  13),  these  balances  are 
brought  direct  from  the  cash  book  to  the  trial  balance. 

§  254.    Preparation  of  Balance  Sheet 

Having  now  considered  and  classified  all  the  items  ap- 
pearing on  the  trial  balance,  the  preparation  of  the  balance 
sheet  is  a  simple  matter,  provided  its  nature  and  purposes 
are  clearly  understood.  The  balance  sheet  may  be  said  to 
consist  of  the  figures  obtained  above,  arranged  in  a  logical 
manner.  There  are,  however,  certain  points  in  regard  to 
this  arrangement  which  require  some  discussion  and  which 
will  therefore  be  taken  up  in  Chapter  XXVIII. 


CHAPTER   XXVII 

THE  TRIAL  BALANCE  AND  MONTHLY  STATE- 
MENTS 

§  255.    The  Purpose  of  a  Monthly  Trial  Balance 

All  good  bookkeepers  take  off  frequent  trial  balances, 
and  many  hours  are  sometimes  occupied  in  the  search  for 
small  errors  in  posting,  adding,  or  balancing.  When  this 
trial  balance  is  completed,  what  does  it  prove?  There  has 
always  been  an  impression,  denied  in  words  but  admitted 
in  practice,  that  it  proves  the  books  to  be  correct.  It  goes 
without  saying  that  such  proof  cannot  be  so  easily  secured. 
It  is,  in  fact,  only  obtained  by  means  of  a  complete  audit, 
and,  very  often,  a  still  further  examination  and  analysis 
is  required. 

The  proof  afforded  by  a  trial  balance  is  merely  nega- 
tive. If  the  debits  do  not  equal  the  credits,  it  is  proof  that 
one  or  more  errors  exist.  Their  equality  may  be  said  to 
prove  nothing,  for  there  could  be  errors  without  number 
and,  provided  the  total  of  the  errors  on  each  side  were 
equal,  the  books  would  still  "be  "in  balance."  It  may  there- 
fore be  said  that  the  usual  form  of  trial  balance  conveys 
comparatively  little  information ;  it  shows  a  series  of  bal- 
ances or  results,  but  considerable  further  examination  and 
information  are  required  before  the  true  meaning  of  these 
results  can  be  obtained. 

§  256.    The  Monthly  Statement 

These  acknowledged  facts  show  that  a  large  amount  of 
labor  is  expended  to  obtain  something  of  comparatively 

260 


MONTHLY    STATEMENTS  26 1 

small  value,  or,  rather,  something  of  which  little  practical 
use  is  made.  This  condition  prevails  in  so  many  well-con- 
ducted offices  as  to  indicate  an  ignorance  of  the  proper  use 
to  be  made  of  the  figures  furnished  in  a  trial  balance,  and 
hence  a  waste  of  labor  in  this  connection — labor  which 
brings  together  quantities  of  material  from  which  valuable 
and  helpful  statements  might  be  constructed,  but  which  is 
left  unused. 

The  remedy  for  this  condition  may  be  found  in  the  form 
of  statement  described  in  the  present  chapter,  which  is  now 
coming  into  general  use.  It  calls  for  no  more  labor  than 
the  trial  balance  but  yields  results  which  are  often  invalu- 
able. Such  a  statement  differs  from  a  mere  trial  balance 
in  two  essentials : 

1.  The  accounts,  instead  of  forming  one  long  list  in  the 
order   of   ledger    folios,    are   classified   and    grouped    into 
"profit-yielding"  accounts,  "sales"  accounts,  "expense"  ac- 
counts, etc.,  each  particular  group  of  accounts  carrying  its 
own  totals. 

2.  In  addition  to  the  balance  of  each  account  on  the 
date  of  the  statement,  there  are  shown  in  two  separate 
columns  the  total  debits  and  the  total  credits  which  have 
been  posted  to  each  account  during  the  month,  or  other 
period,  covered  by  the  statement. 

The  grouping  enables  the  management  to  get  a  sys- 
tematic and  comprehensive  idea  of  the  entire  business,  while 
the  entry  of  debits  and  credits  shows  in  brief  the  business 
transacted  since  the  last  trial  balance. 

§  257.    Advantages  of  the  Monthly  Statement 

Inasmuch  as  such  a  statement  shows  all  ledger  balances, 
it  is  a  trial  balance ;  it  is  also  much  more,  as  \vill  be  seen 
if  we  consider  a  few  of  the  accounts  shown  in  the  state- 
ment on  pages  267  to  270. 


262  REAL    ESTATE    ACCOUNTS 

"Advertising"  shows  a  debit  balance  of  $12,1 14.02.  The 
monthly  columns  show  that  of  this  amount  $783.03  has 
been  spent  during  the  last  month. 

"Real  Estate"  with  a  debit  balance  of  $483,130.13  is  seen 
to  have  increased  (probably  owing  to  purchases  or  can- 
cellations) by  $855,  and  has  been  decreased  (probably  by 
sales)  by  $148.52.  In  such  a  case,  a  reference  to  the  ledger 
will  quickly  enable  one  to  ascertain  the  exact  cause. 

"Bills  payable"  shows  that  there  are  outstanding  notes 
amounting  to  $81,340;  that  during  the  month  $11,889.44 
has  been  paid  off  and  $10,000  has  been  borrowed. 

"Contracts"  account  shows  that  new  contracts  to  the 
amount  of  $8,539.55  have  been  made  during  the  month, 
while  $7,229.04  has  been  credited  by  cash  allowances  and 
cancellations. 

By  grouping  the  accounts,  we  learn  that  our  total  net 
expenses  for  the  month  have  been  $7,832.57  ($7,880.12  — 
$47.55)  and,  for  the  period,  $84,682.38. 

The  value  of  such  information  presented  clearly  and 
regularly  to  a  management,  is  so  obvious  that  further  com- 
ment is  unnecessary. 

§  258.     Method  of  Preparing  the  Monthly  Statement. 

On  pages  267  to  271  the  same  trial  balance  is  shown 
as  was  analyzed  in  Chapters  XXV  and  XXVI.  To  the  figures 
there  shown  have  been  added  the  total  debit  and  total  credit 
appearing  in  each  account  during  the  last  preceding  month. 
These  totals  are  quickly  obtained  if  the  form  of  general 
ledger  shown  in  Form  7  (§  17)  is  used.  The  accounts  are 
grouped  as  follows: 

A.  General  Accounts 

B.  Expense 

C.  Earnings 

D.  Real  Estate 


MONTHLY    STATEMENTS 


263 


E.  Selling  Contracts 

F.  Contracts 

G.  Profits  in  Reserve 
H.    Summary 

etc.,  etc. 

An  examination  of  each  group  of  accounts  shown  in  the 
statement  on  pages  267  to  271,  will  show  that  it  contains  all 
entries  relating  to  that  class,  and  the  totals  give  the  total 
of  such  transactions.  The  grand  total  of  the  summary 
agrees  with  the  total  of  the  trial  balance  given  on  pages 
222  to  225.  In  practice,  the  bookkeeper  usually  has  a  num- 
ber of  blank  forms  typed  in  manifold,  each  one  of  these 
manifolded  forms  containing  all  the  accounts  in  one  classi- 
fication. When  this  is  done  the  time  required  to  take  off 
the  monthly  statement  is  not  appreciably  greater  than  that 
required  for  the  regular  trial  balance. 

It  is  often  said  by  managers  of  real  estate  concerns  in- 
terested in  time  sales,  that  it  is  impossible  to  show  the 
amount  actually  earned  in  any  one  year,  especially  if  that 
year  be  an  early  one  in  the  history  of  the  concern  while  the 
expenses  and  development  are  still  increasing  and  when 
few  sales  have  been  completed.  With  monthly  statements 
such  as  are  outlined  above,  and  with  proper  treatment  of 
profits  from  time  sales,  it  is  possible  to  approximate  very 
closely  not  only  the  earnings  of  a  year,  but  the  earnings  of 
each  month. 

§  259.     Determination  of  Earned  Profits. 

Let  us  consider  the  methods  by  which  such  results  may 
be  obtained.  It  will  be  seen  that  all  general  expenses  are 
included  under  Group  B.  The  figures  are  actual  and  require 
no  explanation.  They  include  current  expenses  in  con- 
nection with  subdivisions,  e.g.,  Parkville  expenses;  while 
those  expenses  pertaining  to  improving  and  developing 


264  REAL    ESTATE   ACCOUNTS 

specific  tracts  are  included  in  Group  D  (Real  Estate),  and 
regarded  as  an  increase  of  investment.  It  is  evident  that 
discretion  must  be  used  in  such  classification.  The  value  of 
these  monthly  estimates  must,  in  fact,  depend  largely  on 
the  judgment  of  those  who  prepare  them.  They  are  not 
intended  for  publication,  nor  even  for  the  stockholders,  but 
are  prepared  for  the  personal  guidance  of  the  executive 
officers.  Conservative  lines  should  therefore  be  followed 
in  their  construction,  or  otherwise,  they  may,  instead  of 
guiding,  actually  mislead  and  deceive.  Probably  the  best 
results  can  be  obtained  if  these  statements  are  prepared  by 
the  auditor  of  the  concern,  whose  training  and  independent 
viewpoint  give  him  the  advantage  over  the  bookkeeper  for 
work  of  this  kind. 

Having  ascertained  the  monthly  expenses,  how  are  the 
profits  to  be  determined  ? 

Group  C  gives  the  definite  earnings  which  appear  on  the 
face  of  the  ledger  and  which  require  no  further  calculation. 
Other  profits  consist  of  a  certain  proportion  of  the  cash  col- 
lected from  time  sales  of  all  classes,  and  the  determination 
of  these  profits  calls  for  the  exercise  of  judgment  and  for 
some  calculation. 

It  has  been  shown  in  §  144  that  the  amount  of  the 
profit  earned  depends  solely  upon  the  amount  of  cash  col- 
lected. This  amount  can  be  determined  from  the  ledger 
or  the  columnar  cash  book.  The  figures  of  Group  J  ( §  270) 
give  these  receipts  for  the  month  covered  by  the  example. 

Group  K  (§271)  is  framed  on  the  experience  of  a 
number  of  years,  during  which  it  has  been  found  that  46% 
of  the  cash  collections  on  time  sales  consist  of  earned 
profits.  This  percentage  will,  of  course,  vary  with  each 
business,  and  will  reach  as  high  as  46%  only  when  a  large 
proportion  of  the  sales  consists  of  development  properties. 
In  or^er  to  be  quite  on  the  safe  side,  only  45%  of  the  cash 


265 

receipts  shown  in  Group  J  is  taken,  and  with  this  figure 
Group  K  gives  very  closely  the  actual  profit  earned  in  the 
month.  If  the  special  ledger  (Form  n,  §  20,  or  Form  15, 
§  23)  is  used,  this  figure,  instead  of  being  estimated,  will  be 
determined  accurately. 

In  Group  I  are  shown  all  sales  made  during  the  month, 
with  the  gains  thereon.  This  is  not  used  in  ascertaining 
earned  profits,  but  is  useful  as  showing  the  business  done; 
e.g.,  a  comparison  of  the  net  amount  of  new  sales  with  the 
cash  collections  in  Group  J  will  show  whether  the  business 
is  growing  or  diminishing;  while  a  comparison  of  these 
figures  month  by  month  shows  whether  or  not  a  satisfactory 
standard  is  being  maintained. 

There  are  two  other  methods  of  calculating  the  pro- 
portion of  cash  receipts  representing  earned  profits,  as 
follows: 

i.  A  comparison  of  the  amount  of  outstanding  con- 
tracts of.  any  one  class  with  the  gains  thereon  will  show  the 
ratio  between  collections  and  earned  profits.  For  example : 

Eureka  Gardens  Contracts  =$2,460 
Gains          =$1,330 

1,330  X  100 

The  fraction  — -       -. represents  the  number  of  cents 

2,460 

in  each  dollar  collected,  which  is  earned  profit. 

The  collections  on  each  subdivision  may,  if  desired,  be 
treated  in  this  way,  in  which  event  Group  F  could  be  made 
to  include  a  column  showing  the  ratio  applicable  in  each 
case;  and  the  earned  profits  and  their  total  could  be  sub- 
stituted for  figure  $8,115.84  in  Group  K  (§271). 

In  the  case  of  profits  from  general  contracts  and  from 
mortgages  receivable,  the  profits  as  a  whole  are  fairly  uni- 
form from  year  to  year ;  and  as  the  general  Gain  on  Sales 
account  is  composed  of  gains  from  these  two  sources,  very 


266  REAL   ESTATE    ACCOUNTS 

close  figures  can  be  obtained  by  a  method  similar  to  that 
described  above. 

2.  In  the  event  that  the  subdivision  sub-ledger  of 
Form  1 5  (  §  23 )  is  kept,  no  calculation  is  necessary  beyond 
mere  addition  or  subtraction;  for  if  the  totals  of  the  "Re- 
serve Realized"  columns  be  taken  off  on  an  adding  machine 
at  the  end  of  each  month,  the  difference  between  the  totals 
for  any  two  months  gives  at  once  the  amount  of  profits 
earned  or  realized. 

§  260.    Comparison  of  Monthly  Statements 

While  each  of  these  monthly  statements  is  of  value 
per  se,  their  value  as  a  whole  increases  each  month  on  ac- 
count of  the  ready  means  they  afford  of  observing  the  fluc- 
tuations of  the  business  and  of  making  monthly  compari- 
sons. If  made  honestly,  these  monthly  statements  give  re- 
sults which  may  be  relied  upon.  It  may  be  argued,  es- 
pecially by  those  not  accustomed  to  use  them,  that  they 
are  in  the  nature  of  estimates.  This  objection,  however, 
does  not  affect  their  value  for  comparative  purposes;  for 
if  the  statements  for  a  series  of  months  are  drawn  on  the 
same  basis,  it  is  evident  they  must  show  correctly  the  com- 
parison between  the  business  transacted  in  the  respective 
months. 

By  means  of  loose  leaves  in  a  "ring"  binder,  it  is  not 
difficult  to  file  these  monthly  statements  in  such  a  manner 
as  to  afford  a  ready  means  of  comparison,  and  also  to  dis- 
pense with  the  monthly  writing  of  the  headings  of  the  vari- 
ous accounts.  Under  this  plan  the  accounts  are  typed  on 
the  right-hand  side  of  sheets  of  the  full  width  (say  8  X  14 
inches)  and  the  monthly  figures  may  be  written  on  sheets 
5  X  14  inches,  containing  four  money  columns  and  hori- 
zontal ruling  to  correspond  with  the  full  sheets,  the  typing 
on  which  will  be  visible  at  all  times. 


MONTHLY   STATEMENTS 
§  261.    A.    General  Accounts 


267 


MONTH'S  BUSINESS 

Acct. 
Nos. 

ACCOUNTS 

BALANCES 

Dr. 

Cr. 

i 
3 
4 

5 
ii 
16 

19 
26 

35 
36 
39 
43 
45 
47 
66 
67 
68 
69 
70 
7i 
72 
80 
82 

9i 
92 

93 
104 

105 
108 
no 

114 
us 

H7 

Accounts  Payable 
Automobiles 
Bills  Payable 
Bills  Receivable 
Capital  Stock 
Contracts  Payable 
Dividends  Unpaid 
Expense,  Mortgage 
Handbook 
Hilton,  A.  B. 
Insurance,  Mortgage 
Int.  Overdue  Mtge.  Pay. 
"       Rec. 
Judgments 
Manning,  R. 
Mortgages    Defic'y  Acct. 
Payable 
Receivable 
in  Settlement 
Office  Furniture 
"       Fixtures 
Petty  Cash 
Profit  and  Loss 
Rinders,  T. 
"  Reserve 
Robinson,  J.,  Trustee 
So.  Bay  Reserve 
Sperry,  J.  M. 
Suspense 
Taxes,  Mortgage 
Townley,  J.  R. 
Treasury  Stock 
Cash 

Dr. 
\ 
I  

Cr. 
$3,420.00 

$400.00 

10,000.00 

$1,138.02 

$11,889.44 

81,340.00 

1,250.00 

305,000.00 
8,002,40 
520.00 

899.00 
50.00 

548.50 
985.00 
130.00 
283.75 

79.85 
80.00 

53.71 

807.00 

1  20.00 

420.00 

1,178.10 
925.00 

125.00 

2I2.OO 
2,OOO.OO 
257,422.30 

2,225.00 

8,000.00 

239.33 

45,000.00 
5,250.00 
3,200.00 
3,156.00 
75-00 

32.00 

75,405.10 

280.00 

525.33 
2IO,4l8.52 
72,000.00 

5,462.00 

7,460.00 

252.00 

422.00 
750.00 
308.15 

12.40 

224.00 

470.OO 

22,000.00 
8,110.40 

8,111.40 

9,895.27 

$29,638.09 

$37,079.31 

$94,989-92 

$1,016,855.65 

268 


REAL    ESTATE    ACCOUNTS 


§  262.    B.    Expense 


MONTH'S  BUSINESS 

Acct. 
Nos. 

ACCOUNTS 

BALANCES 

Dr. 
$783-03 

Cr. 

2 
12 
14 

18 
23 
24 
25 
38 
4i 
42 

53 
59 
61 

65 
78 
79 
81 

87 
90 
94 
103 
106 
109 

Advertising 
Charity 
Commissions  Paid 
Directors'  Meetings 
Eureka  Gardens  Expense 
Expense,  General 
Legal 
Insurance 
Interest     Paid 
Mortgage  Payable 
Kingslake   Commissions 
Ladore  Commissions 
Life  Insurance 
Malvern  Hill  Expense' 
Parkville  Expense 
Commissions 
Postage 
Prospect  Park  Expense 
Repairs 
Salaries 
So.  Bay  Commissions 
Stationery  and  Printing 
Taxes 

Dr. 
$12,114.02 
37-00 
8,325.00 
185.00 
40.00 
12,440.00 
1,522.00 
711.28 
4,640.00 

11,120.00 

461.40 

Cr. 

164.50 
70.00 
1,316.97 
91546 
84.60 
22.00 

436.53 
807.00 
28.00 
60.00 
175-00 
112.46 
35-90 
75.00 
50.06 
240.00 

146.95 
1,888.70 
195-00 
133.85 
138.21 

$20.00 

15.00 
9-50 

$1,580.00 

2,120.00 

7-25 
783-20 
275-00 
725.00 
85.00 
1,245.60 
23,805.00 
4,750.00 
472.00 
398.63 

3-05 

$7,880.12 

$47-55 

$86,262.38 

$1,580.00 

§  263.     C.     Earnings 


MONTH'S  BUSINESS 

Acct. 
Nos. 

ACCOUNTS 

BALANCES 

Dr. 

Cr. 
$322.00 
130.00 
39-07 
420.00 

10 

13 
40 
44 
83 
89 

Cancellation   Profits 
Commissions    Earned 
Interest  Earned 
"        Mortgage  Receivable 
Profits 
Rents 

Dr. 

Cr. 

$3,400.00 

5,220.00 
9,840.OO 
2,400.00 
8,242.IO 
5,780.00 

$168.75 

804.00 

$168.75 

$1,715.07 

$34.882.10 

MONTHLY    STATEMENTS 
§  264.    D.    Real  Estate 


269 


MONTH'S  BUSINESS 

Acct. 
Nos. 

ACCOUNTS 

BALANCES 

Dr. 

Cr. 
$105.00 

6 

7 
8 
9 
17 
30 
33 
49 
51 
52 
56 
58 
60 
63 
73 
74 
86 
88 
97 

IOO 
101 
102 

107 

Brickyard  Royalties 
Building,  Green 
Black 
Brown 
Dawes  Purchase 
Fairmount  Expense 
Grandville   Purchase 
Kingslake  Purchase 
Expense 
"          Lots 
Ladore  Purchase 
Expense 
"        Town  Lots 
Malvern  Hill  Purchase 
Options  Granted 
Held 
Prospect  Park  Purchase 
Real  Estate 
So.  Bay  Farm  Purchase 
"       "     Villa 
Front 
"       "      Expense 
Stumpage 

Dr. 

Cr. 
$1,300.00 

$540.00 

$1,250.00 
72.50 

416.00 
8,640.00 
680.00 

325.00 

8,640.00 
5,795-00 
5,378.oo 
1,272.11 
83,370.60 
75L90 
38,840.00 
4,229.04 
10,560.00 
34,057.00 

! 

173-75 

.. 
40.00 

200.00 

240.00 

90.00 
489.40 
380.00 

5,200.00 

400.00 

3,400.00 
3,402.09 

483,130.13 
95,580.00 
29,550.00 
19,560.00 
32,805.00 

855.00 

148.52 
1,223.20 
28.02 

682.00 

6,250.00 

$11,944.75 

$3,386.14 

$861,643.28 

$13,075.00 

§  265.    E.    Selling  Contracts 


MONTH'S 

BUSINESS 

Acct. 
Nos. 

ACCOUNTS 

BALAN 

CES 

Dr. 

Cr. 

21 

Eureka  Gardens  Purchase 

Dr. 

Cr. 
$i  ^7=;  oo 

28 

Fairmount  Purchase 

1,200.00 

76 

Parkville             " 

8  725  oo 

$195.62 

112 

Torbay  Heights  Purchase 

4,450.00 

$10=5.62 

Si^.r^o.oo 

270  REAL   ESTATE   ACCOUNTS 

§  266.    F.    Contracts 


MONTH'S  BUSINESS 

Acct. 
Nos. 

ACCOUNTS 

BALANCES 

Dr. 

$8,539-55 

Cr. 

$7,229.04 
80.00 

IOO.OO 

85.70 

2,166.55 
630.00 

1,835.70 
549.55 
337.50 
4,840.45 
719.75 
391.25 

IS 
20 
27 
32 
48 
55 
62 

75 
84 
95 
98 
in 

Contracts  —  General 
Eureka  Gardens 
Fairmount 
Grandville 
Kingslake 
Ladore 
Malvern  Hill 
Parkville 
Prospect  Park 
So.  Bay  Farms 
"      "     Villas 
Torbay  Heights 

Dr. 

$165,770.00 
2,460.00 
1,915.00 
1,827.42 
61,799.88 
30,506.00 
37,467.00 
18,842.00 
1,158.08 
212,814.00 
32,850.00 
11,283.00 

Cr. 

3,420.30 
550.00 
4,175-00 

8,600.00 
150.00 

$25.434.85 

$18.065.49 

$578.603.28 

§  267.    G.    Profits  in  Reserve 


MONTH'S  BUSINESS 

Acct. 
Nos. 

ACCOUNTS 

BALANCES 

Dr. 

Cr. 

22 

29 
31 

34 
46 
50 
57 
64 
77 
85 
96 
99 
H3 

Eureka  Gardens  Gains 
Fairmount  Gains 
Gain  on  Sales 
Grandville  Gains 
Interest  Unearned 
Kingslake  Gains 
Ladore  Gains 
Malvern  Hill  Gains 
Parkville  Gains 
Prospect  Park  Gains 
So.  Bay  Farms  Gains 
"      "     Villas  Gains 
Torbay  Heights  Gains 

Dr. 

Cr. 
$1,330.00 
1,200.00 
88,045-84 
1,056.80 
3,529.82 
106,902.00 
25,470.00 
23,022.00 
9,796.00 
1,576.00 
239,657-65 
32,640.00 
5,220.00 

$200.00 

$3,140.00 

290.60 

2,260.00 
350.00 
3,685-60 

183.18 

S,376.8o 
121.08 

101.08 

$865.76 

$14.034.38 

$530.446.11 

MONTHLY   STATEMENTS 
§  268.     H.     Summary 


271 


MONTH'S 

BUSINESS 

BA 

LANCES 

Dr. 

$29,638.09 
7,880.12 
1687=; 

Cr. 
$37,079.31 
47-55 

I  7m  07 

General  Accounts 
Expense 
Earnings 

Dr. 
$94,989-92 
86,262.38 

Cr. 

$1,016,855.65 

1,580.00 
34  882  10 

11,944-75 
195.62 

3,386.14 

Real  Estate 
Selling  Contracts 

861,643.28 

13,075.00 
15.750.00 

25.414.85 

18,965.49 

Contracts 

578,693.28 

865.76 

14,934.38 

Profits  in  Reserve 

C7Q.446.il 

$76,127.94 

$76,127.94 

$1,621,588.86 

$1,621,588.86 

§  269.    I.     Sales  and  Cancellations 

Sales 

New 

Contracts 
Contracts : 

General  $8,539-55 

Kingslake  3,420.30 

Ladore  550.00 

Malvern  Hill 4,175.00 

South  Bay  Farms   8,600.00 

"     Villas  150.00 


Profits 

$3,140.00 

2,260.00 

350.00 

3,685.60 

5,376.8o 

121.98 


$25,434.85    $14,934.38 


Cancellations 
Contracts : 

General   $400.00         $290.00 

Kingslake   340.30  200.60 

South  Bay  Villas 190.00  101.98 


$930.30         $682.58 


272  REAL   ESTATE  ACCOUNTS 

§  270.    J.     Cash  Receipts  for  the  Month 

Contracts : 

General    $7,229.04 

Cancelled 400.00  $6,829.04 

Eureka  Gardens 80.00 

Fairmount    loo.oo 

Grandville 85.70 

Kingslake   $2,166.55 

Cancelled 340.30  1,826.25 

Ladore  630.00 

Malvern    Hill 1,835.70 

Parkville   549-55 

Prospect    Park 337-5O 

South  Bay  Farms   4,840.45 

"    Villas    $71975 

Cancelled 100.00  529.75 

Torbay  Heights 391.25 

$18,035.19 


§  271.    K.    Earned  Profits — Cash  Receipts 

It  has  been  shown  in  §  144  that  earned  profits  vary 
directly  with,  and  depend  solely  upon,  the  cash  receipts. 
An  analysis  of  the  accounts  of  the  concern  for  the  previous 
year  shows  that  the  earned  profits  on  contracts  were  taken 
as  45%  of  the  cash  receipts  from  those  contracts. 

The  cash  collections  on  contracts  shown 
above   are $18,035.19 

45%  of  this  is $8,115.84 

To  this  we  add  the  earnings  in  "C"  $1,715.07 

168.75          1,546.32 

Making  total  earnings $9,662.16 

The  expenses  per  "B"  are $7,880.12 

47-55         7.832.57 
Leaving  net  earnings  for  the  month $1,829.59 


MONTHLY    STATEMENTS 


273 


In  the  above  examples  it  will  be  noticed  that  taxes, 
insurance,  and  interest  are  included  with  the  other  expenses. 
In  some  instances,  where  these  amounts  can  be  definitely 
stated  for  the  whole  year,  it  is  better  to  eliminate  them 
from  the  current  expense  account,  transferring  them  to 
Group  A  (General  Accounts)  ;  and  then,  on  Group  K, 
deduct  one-twelfth  of  the  annual  amount  of  each  of  these 
items.  The  wisdom  of  this  course  depends,  of  course,  upon 
individual  circumstances. 


CHAPTER    XXVIII 

THE    BALANCE     SHEET,    THE    ANNUAL 
REPORT,    AND    SCHEDULES 

§  272.    Nature  of  the  Balance  Sheet 

The  term  "balance  sheet"  is  the  sole  reminder  in  modern 
accountancy  of  what  in  former  days  was  regarded  as  an 
essential  function,  viz.,  that  of  "balancing"  the  accounts. 
At  the  end  of  a  fiscal  period  all  the  accounts  remaining  on 
the  ledger,  after  closing  the  profit  and  loss  account,  were 
entered  in  the  balancing  account,  and  from  it  were  opened 
all  the  accounts  for  the  succeeding  period.  In  other  words, 
all  accounts  went  in  on  one  side  and  came  out  on  the  other 
unaltered  by  a  dot. 

Of  this  practice  only  the  name  survives.  It  is  mentioned 
here  to  remind  the  reader  that  the  word  "balance"  has  two 
entirely  distinct  meanings  in  the  expressions  "balance  sheet" 
and  "trial  balance,"  and  to  indicate  the  cause  for  that 
distinction. 

As  we  have  seen,  the  trial  balance  is  a  list  of  ledger 
balances.  The  balance  sheet  is  a  statement  of  the  accounts 
formerly  passed  through  the  balancing  account.  In  practice 
today,  however,  the  balance  sheet  is  not,  strictly  speaking, 
a  list  of  balances,  but  a  statement  compiled  after  all  the 
nominal  accounts  have  been  brought  together  in  a  profit 
and  loss  account,  or  revenue  account,  and  after  all  inven- 
tories have  been  taken.  The  accounts  still  remaining  on 
the  ledger  show  the  "unfinished  business"  of  the  concern. 
These  balances  are  then  put  in  the  form  of  a  statement  of 
assets  and  liabilities  at  a  given  moment,  together  with 

274 


THE   BALANCE    SHEET   AND    SCHEDULES 


2/5 


such  reserve,  surplus,  or  profit  and  loss  accounts  as  bring 
the  two  sides  of  the  statement  to  an  equality. 

§  273.    Continental  and  English  Forms  of  Balance  Sheet 

The  general  form  of  balance  sheet  known  as  the  Con- 
tinental form  (or,  in  Scotland,  as  the  Scotch  form),  places 
the  assets  on  the  left-hand  and  the  liabilities  on  the  right. 
The  English  form  reverses  this,  but  is  seldom  used  in  this 
country  except  in  statements  for  use  in  England.  The 
difference  between  the  two  forms  may  possibly  be  traced 
back  to  the  balancing  account,  as  it  has  been  suggested  that 
under  the  English  method  the  accounts  are  shown  as  taken 
into  the  balancing  account,  while  the  Continental  form 
shows  them  after  they  have  been  taken  out  of  that  account. 
It  is  more  probable  that  the  English  practice  has  been 
brought  about  solely  by  the  income  tax  acts  of  Parliament, 
which  convey  the  impression  that  the  forms  of  returns 
prescribed  were  prepared  by  those  who  were  authorities  on 
some  subject  other  than  that  of  accountancy. 

Inasmuch  as  the  Continental  form  of  balance  sheet  is 
in  general  use  throughout  the  United  States,  it  is  followed 
in  this  volume,  especially  as  it  appears  more  logical  and 
more  convenient  to  show  any  one  class  of  accounts  on  the 
same  side  of  the  balance  sheet  and  the  trial  balance. 

§  274.    Arrangement  of  Balance  Sheet  Items 

The  balance  sheets  of  transportation  companies,  banks, 
trust  companies,  insurance  companies,  etc.,  are  regulated  by 
statute  or  by  custom,  and  need  not  be  considered  here.  In 
all  balance  sheets,  however,  it  is  desirable  that  some 
uniformity  of  purpose,  if  not  of  arrangement,  be  observed. 

Many  different  orders  of  procedure  have  been  laid  down 
for  the  items  of  the  balance  sheet  and,  unfortunately,  there 
is  no  Herald's  College  clothed  with  authority  to  decide 


276  REAL   ESTATE    ACCOUNTS 

which  shall  prevail.  The  form  given  on  pages  278,  279  is 
based  upon  those  principles  which  appear  to  the  writer  to 
be  the  most  strongly  founded. 

Regarding  the  assets,  which,  as  a  rule,  are  of  a  more 
varied  nature  than  the  liabilities,  the  weight  of  practice 
prescribes  that  the  arrangement  be  based  either  upon  the 
importance  or  the  liquidity  of  the  various  items. 

If  we  arrange  in  order  of  liquidity,  "Cash"  will  head 
the  list ;  yet  there  are  few  cases  in  which  the  cash  appearing 
on  the  balance  sheet  is  important  as  compared  with  other 
items.  Similar  conditions  are  likely  to  exist  as  to  other 
quick  assets,  as,  for  example,  "Bills  Receivable,"  the  final 
result  being  that  if  the  items  are  marshalled  in  order  of 
liquidity,  the  more  important  items  may  be  found  scattered 
throughout  the  statement  instead  of  being  brought  together. 
To  obviate  this,  the  order  of  importance  is  preferable  and 
is  here  adopted. 

In  doing  so,  however,  it  must  not  be  forgotten  that  the 
quick  assets  should  be  clearly  shown  by  themselves,  for  it 
is  frequently  in  them  that  the  banker  may  have  his  chief 
or  only  interest.  These  can  be  shown  as  indicated  on  pages 
278,  279,  without  interfering  in  any  way  with  the  main 
arrangement. 

§  275.    Schedules  Accompanying  a  Balance  Sheet 

It  is  evident  that  if  all  items  were  shown  on  the  balance 
sheet  the  very  purpose  of  that  sheet  would  be  defeated,  for 
its  conciseness  would  be  lost.  For  this  reason  totals  are 
used,  the  details  composing  these  totals  being  shown  in 
accompanying  schedules,  which  must  therefore  be  regarded 
as  part  of  the  balance  sheet.  Such  schedules  include: 

A.  REAL  ESTATE.  The  items  of  this  schedule  are 
taken  from  the  property  ledger  and  show  book  number, 
description,  and  book  value  (or  cost). 


THE  BALANCE  SHEET  AND  SCHEDULES 


277 


B.  MORTGAGES  RECEIVABLE.  The  items  of  this  schedule 
are  taken  from  the  sub-ledger,  and  show  the  book  number 
of  each  mortgage,  and  the  name,  due  date,  rate  of  interest, 
amount,  and  book  number  of  the  property  concerned.    This 
statement  may  also  show  in  a  separate  column  the  total 
charges  of  all  kinds  standing  against  each  mortgage  and 
shown  on  the  balance  sheet  given  on  pages  278  and  279. 

C.  CONTRACTS  OUTSTANDING.     This  schedule  is  a  list 
of  the  balances  of  the  sub-ledger.     It  may  be  well  to  show 
the  book  number  of  each  piece  of  property  involved,  and 
any  overdue  items  may  be  noted  thereon. 

D.  BILLS  RECEIVABLE.     This  schedule  is  taken  from 
the  ledger  or  the  bills  receivable  book,  showing  name  of 
make,  due  date,  and  amount. 

E.  SUNDRY   DEBTORS.     This  schedule  comprises  all 
those  debtors  appearing  in  the  general  ledger  and  in  the 
balance  sheet ;  names  and  amounts  should  be  given,  together 
with  a  brief  description  of  any  items  calling  for  special 
remark. 

F.  CASH.    This  schedule  consists  of  a  list  of  bank  bal- 
ances when  accounts  are  kept  with  several  banks.     As  a 
rule  these  details  are  shown   on  the  balance   sheet  itself 
rather  than  on  a  special  sheet. 

G.  MORTGAGES  PAYABLE 
H.    CONTRACTS  PAYABLE 
I.    BILLS  PAYABLE 

J.    SUNDRY  CREDITORS 

The  schedules  G-J  should  show  items  similar  to  those 
in  schedules  B,  C,  D,  and  E. 

§  276.    Form  of  Balance  Sheet 

The  balance  sheet  of  the  Alpha  Land  Company  is  shown 
on  the  following  pages.  This  is  given  complete,  but  is 
followed  by  the  same  balance  sheet  in  condensed  form. 


278 


REAL   ESTATE   ACCOUNTS 


THE    ALPHA 
BALANCE   SHEET— 


Assets  Sch. 

Real  Estate,  at  cost A  $779,356.89 

Less  Options  Granted 5,200.00    $774,156.89 

Mortgages  Receivable,  Principal    B  $45,000.00 

Mortgage  Expenses   B       $548.50 

Insurance B         283.75 

"          Interest    B      1,178.10 

"         Taxes  B         308.15          2,318.50 

Total,  Good  Mortgages  Receiv- 
able    $47,318.50 

Mortgages  in  Settlement $5,250.00 

Less  Mortgage  Deficiency  Ac- 
count   2,000.00          3,250.00 

Contracts   Outstanding C  568,433-33 

Total  Time  Sales  Outstanding, 
Net  619,001.83 

Bills   Receivable D  $1,175.00 

Sundry  Debtors E  1,477.00         2,652.00 

Equipment : 

Automobiles $738.02 

Office  Furniture 2,720.00 

"       Fixtures 2,682.60          6,140.62 

Sundries : 

Suspense  Account $750.00 

Handbook    985.00          i,735.oo 

Cash: 

Petty  Cash $75.oo 

Deposited  with  Bankers F  8,110.40          8,185.40 


$1,411,871.74 


THE  BALANCE  SHEET  AND  SCHEDULES 


279 


LAND     COMPANY 
DECEMBER  31,  1916 

Liabilities  Sch. 

Capital  Stock  Issued $305,000.00 

(Authorized  $500,000) 

Less  Treasury  Stock 22,000.00    $283,000.00 

Robinson,  J.,  Trustee $210,418.52 

Mortgages  Payable,  Principal..    G    257,422.30 
"  "         Interest   . .  120.00 

Contracts  Payable — unpaid  pur- 
chase money  on  properties  in- 
cluded in  Real  Estate  Account    H        8,002.40 
Total  "Real  Estate"  Liabilities..  $475,963.22 

Bills  Payable J     $81,340.00 

Sundry  Creditors K  695.71 

Unpaid  Dividends 520.00 

Accounts   Payable 3,420.00 

Total  Current  Liabilities 85,975.71 

Purchase  Contingent  Liability 
due  only  on  completion  of 
sales  included  in  Time  Sales 
Contract  Account: 

Eureka  Gardens $1,195.00 

Fairmount    1,200.00 

Parkville   3,950.oo 

Rinders,  T 525-33 

Torbay  Heights 4,450.00        11,320.33 

Total     Liabilities,     other     than 

Capital  Stock 573,259-26 

Total   Liabilities "$856,259.26 

Reserve  and  Undivided  Profits : 
Uncompleted  Bldgs.,  Brown.  $325.00 

Commissions,  Ladore 1,580.00 

Expenses,   Ladore 2,500.00 

South  Bay 72,000.00      $76,405.00 

Reserve  Profits L  $361,790.37 

Less  due  Kingslake  owner...  11,000.00      350,790.37 

Profit  and  Loss  Account,  bal- 
ance brought  forward $75,405.10 

Profits  for  the  period M      53,012.01       128,417.11 

Total    Reserve    and    Undivided 

Profits  555,612.48 

$1,411,871.74 


280 


REAL    ESTATE    ACCOUNTS 


THE  ALPHA  LAND  COMPANY 
CONDENSED  BALANCE  SHEET — DECEMBER  31,  1916 


Assets 

Real  Estate  Unsold $774,156.89 

Mortgages     and     Con- 
tracts     619,001.83 

Bills   Receivable i,i75-OO 

Equipment 6,140.62 

Sundry  Debtors,  etc 3,212.00 

Cash   8,185.40 


$1,411,871.74 


Liabilities 

Capital  Stock  Outstand- 
ing   $283,000.00 

Mortgages  and  Con- 
tracts Payable 475,963.22 

Bills  Payable 81,340.00 

Sundry  Creditors 4,115.71 

Purchases  (Contingent 

Liability)  11,320.33 

Dividends  Unpaid 520.00 


Total   Liabilities $856,259.26 

Reserve,  Fees,  Improve- 
ments and  Taxes....  76,405.00 

Profits  in  Reserve 350,790.37 

Profit  &  Loss  and  Un- 
divided Profits 128,417.11 


$1,411,871.74 


It  has  been  said  above  that  a  balance  sheet  is  not  strictly 
a  collection  of  ledger  balances,  and  several  examples  of 
the  fact  are  found  in  the  form  on  pages  278,  279.  For 
example,  the  first  item  of  "Real  Estate"  is  reduced  by  the 
sum  received  for  options,  which  must  be  treated  as  purchase 
money  until  the  options  expire.  Other  instances  appear  in 
"Mortgages  in  Settlement"  and  "Capital  Stock";  and  in 
each  case  it  will  be  seen  that  a  clearer  statement  is  obtained 
by  the  methods  followed  than  if  the  various  items  had  been 
placed  separately.  It  will  also  be  seen  that  the  sub-totals 
of  the  balance  sheet  show  clearly  on  the  one  side  the  total 
real  estate  owned  and  the  total  unpaid  balances  on  all 
time  sales;  while,  on  the  other  side,  they  show  the  capital 
stock  liability,  the  current,  the  contingent,  and  the  total 
liabilities. 


THE  BALANCE  SHEET  AND  SCHEDULES    28l 

§  277.    Schedules  to  Accompany  Annual  Report 

We  now  come  to  another  class  of  schedules,  which, 
though  accompanying  a  balance  sheet,  are  not  so  much  a 
part  of  it  as  of  an  annual  report.  The  form  of  such  a 
report  must  vary  with  the  nature  and  size  of  the  business, 
with  various  existing  legal  requirements  (as  is  so  fre- 
quently the  case  in  reports  of  English  corporations),  and 
with  the  individuality  of  the  person  preparing  it. 

It  goes  without  saying  that  a  report  must  be  truthful, 
but  truth  is  many-sided  and  may  be  expressed  in  different 
ways.  In  describing  the  forms  for  an  annual  report,  there- 
fore, dogmatism  as  to  details  must  be  laid  aside,  and  the 
following  suggestions  are  made  merely  to  indicate  the 
general  requirements  of  a  complete  report. 

In  considering  this  report  it  is  assumed  that  the  concern 
reporting  is  a  corporation  in  which  many  stockholders  are 
interested,  and  it  is  intended  that  the  report  shall  be  suffi- 
ciently complete  to  enable  the  officers  to  answer  any 
legitimate  questions  which  may  be  put  at  a  stockholders' 
meeting.  Apart  from  this,  however,  a  complete  tabulation 
of  a  year's  results  is  of  value  on  account  of  the  minute 
examination  of  each  account  which  it  compels,  and  which 
often  brings  to  light  matters  that  have  been  omitted  or  over- 
looked. In  addition,  a  complete  report  has  value  in  suc- 
ceeding years  as  a  convenient  reference  for  purposes  of 
comparison;  if  well  prepared,  it  almost  obviates  reference 
to  the  books  themselves. 

The  basis  of  the-  report  is,  of  course,  the  balance  sheet 
and  its  accompanying  schedules.  The  report  should  give 
any  further  explanations  which  may  be  advisable,  should 
give  prominence  to  points  requiring  attention,  and  perhaps 
contain  suggestions  for  guidance  in  the  future. 

The  schedules  accompanying  a  report  include  such  state- 
ments as  the  following: 


282  REAL    ESTATE    ACCOUNTS 

Cash  Receipts,  classified  by  months  and  by  sources. 

Disbursements,  classified  by  months  and  by  distribu- 
tions. 

Sales,  classified  by  months  and  by  divisions ;  e.g.,  cash, 
mortgage,  contract,  etc. 

Expense  accounts  of  all  kinds,  analyzed  by  months. 

These  statements  are  particularly  illuminating  when,  in 
addition,  they  compare  the  figures  for  the  current  year  with 
those  for  preceding  years. 

The  preparation  of  the  report  of  the  president  or  of  the 
directors  does  not  lie  with  the  accounting  department,  still 
the  report  of  that  department  should  contain  all  such  in- 
formation as,  in  the  judgment  of  the  accountant,  is  neces- 
sary to  exhibit  clearly  the  business.  The  duty  of  an  account- 
ant to  make  suggestions  depends  almost  entirely  upon  the 
nature  of  his  engagement  and  the  duties  he  has  undertaken ; 
these  vary  in  the  United  States  according  to  the  wishes  of 
the  particular  board  or  of  the  individual  officer  through 
whom  the  engagement  is  made. 


CHAPTER   XXIX 

REAL  ESTATE  AUDITS 

§  278.    Real  Estate  Inventories 

Before  entering  upon  the  details  of  auditing  real  estate 
accounts,  it  is  well  to  consider  the  points  wherein  such  an 
audit  differs  from  that  of  a  mercantile  or  manufacturing 
concern.  In  a  general  way,  the  differences  may  be  indi- 
cated by  the  one  word  "inventories." 

The  duties  of  auditors  in  connection  with  the  inven- 
tories of  the  ordinary  business  concern  are  no  safe  guide  in 
the  audit  of  a  real  estate  concern,  for  the  reason  that,  as  a 
rule,  the  manner  of  taking  inventories  is  different.  The 
accounts  corresponding  to  the  usual  inventories  are  those 
which  appear  in  the  balance  sheet  under  the  heads  of  Real 
Estate,  Mortgages,  Contracts,  etc. ;  and  a  real  estate  con- 
cern when  preparing  its  balance  sheet  does  not  send  out  a 
stock  clerk  to  list  its  holdings  by  actual  count  and  measure- 
ment, but  depends  upon  the  records  in  the  office  itself. 

§  279.     Verification  of  Real  Estate  Assets 

In  the  last-named  respect,  a  real  estate  audit  resembles 
that  of  a  bank  or  a  trust  company;  and  it  is  evident  that 
any  bank  auditor  would  be  guilty  of  grave  dereliction  of 
duty  if  he  failed  to  satisfy  himself  by  minute  investigation 
that  the  securities  and  other  assets  (i.e.,  the  inventories  of 
the  institution)  were  as  represented. 

An  important  difference  exists,  however,  between  the 
audit  of  real  estate  assets  and  the  audit  of  the  assets  of  a 
bank.  The  verification  of  real  estate  assets  must  not  only 

283 


284  REAL   ESTATE   ACCOUNTS 

include  proof  that  all  the  assets  claimed  are  really  held,  but 
should  also  show  that  no  such  asset  is  used  illegitimately. 
Stress  is  laid  upon  this  latter  point  for  two  reasons : 

1.  The  customs  prevailing  in  the  handling  and  record- 

ing of  real  estate  render  the  illegitimate  use  of 
assets  unusually  easy. 

2.  Past  experience  has  shown  that  this  point  has  been 

frequently  overlooked  by  auditors  and  that  such 
oversight  has  resulted  in  grave  losses  to  clients. 

The  frauds  possible  under  existing  conditions  may  re- 
sult from  carelessness  and  ignorance,  but  arise  chiefly  from 
dishonesty  on  the  part  of  those  responsible ;  and,  while  it  is 
not  intended  to  attempt  any  catalogue  of  the  frauds  com- 
mon or  possible  in  real  estate  transactions,  the  illustrations 
cited  in  the  present  chapter  will  indicate  certain  dangers 
which  exist. 

In  the  case  of  financial  securities,  any  change  of  owner- 
ship, and  more  especially  any  hypothecation  of  such  securi- 
ties, usually  requires  the  documents  themselves  to  be  placed 
in  the  hands  of  the  lender  or  of  his  representative.  This 
condition  does  not  apply  to  real  estate.  An  owner  pledg- 
ing a  piece  of  property  in  any  way  usually  retains  posses- 
sion of  the  documents  showing  his  title  to  the  property. 
The  possession  of  such  papers  does  not  therefore  prove  a 
clear  title,  as  does  usually  the  possession  of  a  bond.  Again, 
when  mortgages  are  satisfied,  a  "satisfaction  piece"  is 
usually  given,  and  it  is  by  no  means  an  unknown  thing  for 
the  mortgagor  not  to  insist  upon  the  return  of  the  original 
mortgage.  For  these  and  similar  reasons,  it  is  of  the  first 
importance  that  the  auditor  satisfy  himself  that  all  money 
received  from  or  on  account  of  real  estate  is  properly  shown 
on  the  cash  book,  mortgage  books,  and  on  the  real  estate 
ledger  itself. 


REAL  ESTATE   AUDITS  285 

§  280.    Examination  of  Records 

If  further  evidence  of  the  nature  and  condition  of  titles 
is  required,  it  is  usually  practicable  to  have  the  proper 
county  or  other  official  furnish  periodical  lists  of  all  papers 
recorded  with  him  in  which  the  name  of  the  concern  ap- 
pears. Such  a  list  would  enable  an  auditor  to  verify  almost 
completely  all  transactions  regarding  the  purchase  and 
mortgaging  of  property.  The  word  "almost"  is  inserted 
with  intent,  as,  if  fraud  were  deliberately  planned,  fictitious 
changes  of  ownership  might  be  arranged  in  order  to  pre- 
vent the  name  of  any  mortgagor  appearing  on  record  twice. 
This  possibility,  however,  can  be  met  by  having  the  lists 
prepared  by  an  outside  abstract  company,  and  having  them 
cover  all  entries  relating  to  lands  in  which  the  concern  is 
interested. 

Contracts  are  frequently  not  recorded,  and  their  veri- 
fication is  considered  later  in  §  290. 

§  281.    Mortgage  Frauds 

Another  fraud  frequently  practiced  is  the  multiplying  of 
mortgages  on  the  same  piece  of  property.  This  can  be  ef- 
fectively guarded  against  by  proper  entries  on  the  real  es- 
tate ledger,  by  the  record  of  each  mortgage,  and  by  refer- 
ence to  the  periodical  lists  of  the  above-mentioned  record- 
ing officials. 

Cases  have  occurred  in  which  books,  records,  and  ac- 
counts appeared  to  be  in  perfect  order,  and  auditors  there- 
fore granted  favorable  certificates,  which  were,  however, 
based  solely  on  the  financial  records  and  an  accompanying 
certificate.  For  each  loan  included  in  the  assets  there  was 
a  mortgage  technically  correct  in  all  details,  but  it  was  not 
considered  necessary  to  bring  the  financial  transactions  on 
to  the  tract  books  or  plat  books,  and,  in  the  case  of  a  large 
business  with  some  hundreds  of  mortgages  outstanding, 


286  REAL   ESTATE    ACCOUNTS 

the  auditors  failed  to  discover  that  certain  lands  were  cov- 
ered by  one,  two,  or  even  three  mortgages. 

§  282.    Details  of  an  Audit 

The  complete  audit  of  such  a  concern  as  is  represented 
in  the  typical  trial  balance  shown  in  Chapter  XXV  would 
include  a  verification  of  the  following  classes  of  accounts: 

Cash  Receipts 

Cash  Disbursements 

Real  Estate  Owned 

Mortgages  Receivable,  Principal,  and  Interest 

Contracts 

Equipment 

Sundry  Debtors 

Capital  Stock 

Treasury  Stock 

Trustees'  Accounts 

Mortgages  Payable,  Principal,  and  Interest 

Contracts  Payable 

Bills  Payable 

Sundry  Creditors 

Purchase  Accounts 

Unpaid  Dividends 

Rents 

Reserve  Accounts 

Reserve  Profits 

Profit  and  Loss  Account 

Branch  Offices 

Subdivisions : 

(a)  Earned  Profits 

(b)  Profits  in  Reserve 

(c)  Cost  of  Unsold  Lots 

(d)  Condition  of  Open  Contracts 


REAL   ESTATE   AUDITS 


287 


§  283.    Methods  of  Conducting  an  Audit 

Owing  to  the  number  of  schedules,  trial  balances,  calcu- 
lations of  earned  profits,  verification  of  subdivision  prop- 
erties, etc.,  the  working  sheets  of  an  audit  accumulate  very 
quickly  if  the  concern  is  a  large  one,  and  it  is  important 
that  some  means  of  quick  reference  be  provided.  The  fol- 
lowing method  of  audit  is  therefore  suggested : 

The  ledger  balances  are  entered  on  analysis  paper  bound 
together  in  book  form,  and  are  numbered  consecutively  as 
in  the  typical  trial  balance.  All  working  sheets,  whether 
plain  or  ruled,  should  be  of  uniform  size,  say  the  regular 
journal  paper,  and  all  adding  machine  work  should  be  done 
on  such  sheets,  running  several  columns  to  the  page,  rather 
than  on  the  usual  narrow  machine  paper  which  may  result 
in  yards  of  unmanageable  ribbon. 

Each  working  sheet  is  numbered  with  the  account  num- 
ber, and  all  sheets  relating  to  that  account  are  numbered 
consecutively,  the  account  number  appearing  to  the  left 
of  the  sheet  number.  For  example,  the  sheets  relating 
to  Kingslake  contracts,  the  account  number  of  which  is 
48,  would  be  numbered  in  proper  order,  48-1,  48-2,  etc. 
On  completion  of  the  audit,  all  these  sheets  are  arranged 
in  numerical  order,  bound  together,  and  filed  for  reference. 

§  284.    Audit  of  Cash  Receipts 

The  general  cash  receipts  should  be  compared,  item  by 
item,  with  the  carbon  copies  of  the  receipts  given  to  the 
parties  paying  this  cash,  noting  especially  that  each  entry 
has  been  credited  in  the  appropriate  column  and  that  the 
sources  of  the  payments  are  correctly  given;  e.g.,  property 
numbers,  mortgage  numbers,  and  contract  numbers.  This 
comparison  checks  all  receipts  into  the  cash  book.  The 
"Bank"  column  of  the  cash  book  should  be  checked  with 
the  bank  pass-books,  and  all  additions  should  be  verified. 


288  REAL   ESTATE   ACCOUNTS 

The  total  cash  receipts  must  equal  the  total  amount  de- 
posited in  the  banks,  as  stated  in  §  13,  and  no  variation, 
however  slight,  should  be  allowed  to  pass  until  satisfac- 
torily explained. 

The  further  checking  of  receipts  to  their  proper  accounts 
in  the  sub-ledgers  will  be  discussed  in  §  286  ct  seq. 

§  285.    Audit  of  Cash  Disbursements 

As  all  disbursements  are  made  by  check,  the  returned 
checks  themselves  afford  satisfactory  proof  of  the  expendi- 
ture of  the  various  amounts  shown.  These  checks  should 
be  signed  by  both  the  cashier  and  the  treasurer,  or  some 
other  officer  who  does  not  have  the  handling  of  the  actual 
currency.  The  distribution  of  these  amounts  demands  con- 
stant watchfulness  on  the  part  of  the  auditor,  who  should 
also  see  that  each  check  or  voucher  check,  as  the  case  may 
be,  is  approved  by  the  proper  officers  and  supported  by  suf- 
ficient vouchers. 

The  bank  pass-books  should  be  balanced  at  the  close 
of  each  month,  and  the  balances  compared  with  those  of 
the  cash  book.  It  is  a  good  practice  for  the  bookkeeper 
invariably  to  show  on  the  cash  book  itself  each  month  the 
reconciliations  with  the  banks,  in  some  such  form  as  the 
following : 

Memo.  : 

Bank  pass-book $7,102.45 

Cash  book  balance $6,832.10 

Add  checks  not  presented : 

No.  21 12  $110.06 

2114  25.50  • 

2116  104.25 

2117  30.60  270.35 

$7,102.45 


REAL   ESTATE   AUDITS  289 

The  enforcement  of  this  rule  insures  the  accuracy  of 
the  balances  carried  forward  and  saves  auditors  consid- 
erable time  in  their  work. 

In  some  cases,  such  as  special  examinations  and  balance 
sheet  audits,  the  auditor  should  obtain  a  letter  from  the 
bank  verifying  the  pass-book  balance. 

§  286.    Audit  of  Property  Ledger 

As  already  stated,  the  careful  auditing  of  the  property 
ledger  is  a  most  important  part  of  the  auditor's  work.  He 
is  not  responsible  for  the  actual  value  of  real  estate,  nor  for 
the  validity  of  the  titles  thereto,  nor  is  he  called  upon  to 
give  any  certificate  thereon.  He  should,  however,  see  that 
the  books  show  the  actual  cost  of  each  piece  to  the  concern, 
and  that  all  certificates  required  by  the  rules  of  the  concern, 
such  as  appraisers'  valuations,  attorneys'  certificates  of  title, 
etc.,  are  in  order.  He  should  also  see  that  the  accompany- 
ing papers  of  value,  such  as  title  policies,  abstracts  of  title, 
fire  insurance  policies,  etc.,  have  been  duly  received,  or  at 
least  that  definite  responsibility  for  them  rests  upon  some 
official. 

It  is  important  to  see  that  properties  covered  by  mort- 
gages, especially  mortgages  receivable,  are  entered  in  their 
proper  places.  This  not  only  enables  those  in  charge  to  care 
for  taxes  on  these  properties,  but  enables  the  auditor  to 
satisfy  himself  that,  so  far  as  these  records  show,  the  mort- 
gages are  not  duplicated. 

The  entry  of  contracts  is  equally  important.  If  omitted, 
such  assets  may  be  duplicated  by  inclusion  in  the  Real  Es- 
tate account  as  well  as  in  the  Contracts  account.  In  other 
words,  when  any  disposition  is  made  of  a  piece  of  property, 
whether  by  cash  sale,  time  sale,  exchange,  option,  or  any 
other  method,  that  property  should  immediately  be  taken 
out  of  the  property  ledger. 


290 


REAL   ESTATE   ACCOUNTS 


§  287.    Appraisals  of  Real  Estate 

It  is  not  unusual  to  engage  expert  appraisers  to  value 
lands,  and  these  values  are  frequently  shown  on  balance 
sheets  in  memorandum  form.  The  auditor  should  compare 
such  certificates  with  the  property  ledger,  if  he  is  to  certify 
that  these  valuations  apply  to  the  property  shown  on  the 
books  he  is  auditing.  It  must  always  be  borne  in  mind 
that  the  only  rule  to  follow,  and  one  to  which  there  are  few 
exceptions,  is  that  which  requires  the  books  to  show  always 
the  actual  cost  of  property.  (See  Chapter  X.) 

Should  values  appear  to  have  depreciated,  it  is  some- 
times wise  to  open  a  depreciation  account  similar  to  the 
Mortgage  Depreciation  account,  in  which  to  carry  tem- 
porarily the  apparent  depreciation.  Should  actual  values 
be  known  to  be  less  than  the  book  value  so  that  there  is  no 
reasonable  hope  of  avoiding  a  loss,  ordinary  good  manage- 
ment would  insist  that  the  loss  be  allowed  for  on  the  books 
either  by  charging  the  loss  direct  to  Profit  and  Loss  ac- 
count, or  through  a  Depreciation  account,  a  portion  of 
which  can  be  written  off  to  Profit  and  Loss  each  fiscal  pe- 
riod. 

§  288.    Mortgages  Receivable 

The  cash  transactions  affecting  this  account  are  checked 
from  the  cash  book,  while  the  amount  of  the  principal  is 
obtained  from  the  report  of  sales,  from  the  property  ledger, 
or  from  the  journal. 

It  will  frequently  be  found  that  some  of  the  mortgages 
are  second  mortgages,  especially  in  cases  where  the  original 
first  mortgage  was  given  to  enable  the  owner  to  complete 
certain  improvements,  but  was  found  insufficient  in  amount 
so  that  a  second  mortgage  was  given  for  a  further  advance. 
All  such  facts  should  be  clearly  noted  on  both  of  the  sub- 
ledger  accounts  relating  to  the  property,  the  original  mort- 


REAL   ESTATE   AUDITS 


291 


gage  being  marked,  "See  Mortgage  No for  second 

mortgage,"    and    the    second    mortgage   marked,    "Second 

mortgage  to  No "     Both  mortgages  should  be  shown 

on  the  property  ledger. 

A  schedule  of  these  mortgages  should  be  prepared  to 
accompany  the  balance  sheet,  showing  the  number,  name  of 
mortgagor,  and  unpaid  balance  of  each,  together  with  the 
total  of  interest  and  charges;  and  this  schedule  should  in- 
dicate clearly  all  mortgages  other  than  first  mortgages.  The 
total  must  agree  with  the  Mortgage  Receivable  account  in 
the  general  ledger,  and  the  columns  for  charges  must  equal 
the  sum  of  the  following  accounts : 

Overdue  Mortgage  Receivable  Interest 
Mortgage  Insurance 
Mortgage  Expenses 
Mortgage  Taxes 

The  auditor  should  carefully  examine  each  account  and, 
when  necessary,  show,  either  by  footnotes  or  supplementary 
schedules,  all  mortgages  on  which  either  principal  or  in- 
terest is  unduly  in  arrears. 

§  289.    Commission  Accounts 

These  accounts,  and  especially  Commissions  Paid,  need 
careful  examination.  Commissions  paid"  usually  arise  from 
sales  of  the  concern's  property  by  outside  agents,  and  the 
accounts  should  be  so  kept  as  to  show  clearly  to  whom  each 
item  is  paid  and  the  book  number  of  the  property  concerned. 
It  is  convenient  to  carry  this  information  into  the  ledger 
entry  in  some  such  form  as  the  following : 

Jan.  13     Cash,  J.  Abbott,  in  full  account  Contract  No.  475. . .  $75 

This  makes  it  possible  to  ascertain  quickly  at  any  time 
the  total  amount  paid  to  any  one  person,  or  on  any  par- 


2Q2 


REAL   ESTATE   ACCOUNTS 


ticular  property  or  section.  The  payment  of  commissions 
on  time  sales,  where  the  commissions  are  paid  as  collections 
proceed,  can  best  be  recorded  in  a  commission  ledger  similar 
to  Form  12,  §  21. 

Commissions  received  arise  chiefly  from  three  sources: 

1.  Sale  by  the  concern  of  property  owned  by  others. 

2.  Commissions  on  loans  arranged. 

3.  Commissions  on  rents  collected. 

An  examination  of  the  "commission  business  register" 
will  quickly  show  if  all  earned  commissions  of  Classes  I 
and  2  are  accounted  for,  while  an  examination  of  the  rent 
records  will  afford  a  check  or.  items  in  Class  3. 

§  290.    Contracts 

The  general  remarks  under  "Mortgages  Receivable" 
(§  288)  apply  equally  to  "Contracts"  kept  in  the  contracts 
sub-ledger,  a  similar  schedule  being  prepared. 

§  291.    Auditing  Subdivision  Property 

In  the  case  of  subdivision  accounts,  whenever  a  balance 
sheet  is  drawn  up,  there  should  invariably  be  prepared  a 
detailed  list  showing  lot  and  block  numbers,  or  a  correspond- 
ing description,  of  the  lots  owned  and  unsold  in  each  sub- 
division. 

The  number  of  these  unsold  lots,  multiplied  by  the  cost 
per  lot,  should  equal  the  amount  appearing  in  the  Purchase 
account,  when  each  subdivision  is  carried  by  itself  in  the 
general  ledger,  or  the  amount  in  the  real  estate  ledger  show- 
ing the  cost  of  the  property  on  hand. 

In  none  of  the  accounts  is  error  more  likely  to  occur 
than  here,  and,  if  possible,  the  auditor  should  keep  the  lists 
of  subdivision  properties  in  his  own  possession  with  his 
working  sheets. 


REAL   ESTATE   AUDITS  293 

§  292.    Subdivision  Sales 

In  the  case  of  subdivision  time  sales  where  no  interest 
is  charged,  the  directions  of  Chapters  XXI  and  XXIII  give 
also  the  manner  of  auditing.  If  the  special  ledger  (Form 
:5»  §  23)  is  used,  the  balances  shown  can  easily  be  veri- 
fied by  adding  machine  lists.  It  may  be  well  to  urge  the 
wisdom  in  all  cases  of  calculating  the  unearned,  i.e.,  the 
"reserve"  profits;  of  keeping  them  in  the  balance  sheet, 
and  carrying  to  Profit  and  Loss  only  such  surplus  as  the 
Gain  account  may  contain  in  excess  thereof  (§171). 

§  293.    Subdivision  Histories 

In  cases  where  a  concern  deals  with  a  number  of  sub- 
divisions, the  auditor  will  find  it  convenient  to  use  the  sub- 
division history  described  in  §35  (Form  31),  entering 
thereon  all  the  particulars  as  to  the  cost  price,  area,  name 
of  vendor,  size  of  lots,  method  of  payment,  terms  of  con- 
tract, etc. ;  and,  at  the  close  of  his  audit,  entering  thereon 
the  number  of  lots  unsold  and  the  book  value  thereof.  These 
sheets,  when  bound  and  kept  from  year  to  year,  form  a 
convenient  means  of  preserving  information  which  is  needed 
each  time  an  audit  is  made.  The  data  should  be  obtained 
from  the  original  papers  and  not  from  any  hearsay  evidence, 
as  such  contracts,  especially  of  the  nature  of  selling  con- 
tracts, involve  a  great  many  details  which  may  not  be 
transcribed  accurately  from  memory. 

§  294.    Equipment 

Schedules  of  equipment  should  be  prepared  at  the  close 
of  each  fiscal  period,  in  order  to  satisfy  the  auditor  that  the 
values  are  actually  as  represented.  Depreciation  should  be 
charged  on  all  items  appearing  in  this  account,  and  should 
usually  average  from  10  to  15%  of  the  cost,  except  in  the 
case  of  motor  cars,  where  2$%  is  the  lowest  rate  allowable. 


294  REAL    ESTATE    ACCOUNTS 

§  295.    Sundry  Debtors 

These  call  for  no  special  comment.  A  schedule  of  them 
should  accompany  the  balance  sheet,  and  attention  should 
be  called  to  any  which  are  in  arrears.  Bad  debts  should, 
of  course,  be  written  off  in  this  as  in  any  other  business. 

§  296.     Capital  Stock  and  Treasury  Stock 

The  total  certificates  outstanding,  as  shown  by  the  stock 
certificate  book  and  stock  register,  should  agree  with  the 
Capital  Stock  account,  unless  unpaid  subscriptions  exist. 
The  details  of  checking  these  accounts  are  the  same  as  in 
all  other  corporations  and  need  not  be  enlarged  upon  here. 
The  existence  of  treasury  stock  should  be  proved,  not  by 
certificates  pasted  in  the  book,  but  by  new  certificates  which 
should  be  filed  with  the  other  securities  of  the  concern. 

In  the  case  of  a  company  which  habitually  acquires 
treasury  stock  by  purchase  or  exchange,  careful  examina- 
tion should  be  made  of  all  entries  relating  to  such  transac- 
tions; and  it  should  never  be  forgotten  that  gains  arising 
from  this  source  do  not  necessarily  form  a  part  of  the 
profits  from  the  business  of  the  company.  In  such  transac- 
tions the  price  is  not  always  par,  and  confusion  frequently 
arises  in  this  connection.  The  correct  rule  is  that,  what- 
ever price  is  paid,  Treasury  Stock  account  should  be  debited 
with  the  par  value  of  the  stock.  The  difference  between 
Capital  Stock  and  Treasury  Stock  will  then,  and  only  then, 
show  the  amount  of  capital  stock  outstanding  and  subject 
to  dividends.  The  profit  or  loss  resulting  from  such  op- 
erations should  be  carried  to  a  Reserve  or  Surplus  account, 
rather  than  to  the  Profit  and  Loss  account. 

§  297.    Mortgages  Payable,  Contracts  Payable,  Bills  Pay- 
able, Sundry  Creditors 
The   sub-ledgers   for  these   credit  accounts   should  be 


REAL   ESTATE   AUDITS  295 

treated  in  a  manner  similar  to  that  followed  in  the  case  of 
the  corresponding  debit  accounts  —  "Mortgages  Re- 
ceivable," etc.  —  on  the  other  side  of  the  balance  sheet, 
and  schedules  of  each  should  appear  in,  or  accompany,  the 
balance  sheet.  In  addition  to  this,  the  amounts  due  might 
be  verified  by  writing  to  the  respective  holders,  in  the  same 
manner  as  is  usually  adopted  to  verify  the  accounts  payable 
of  a  mercantile  concern. 

§  298.    Purchase  Accounts 

As  these  represent  amounts  payable  to  owners  of  land 
for  property  the  concern  has  arranged  to  sell  on  time,  they 
need  careful  examination,  for  differences  with  the  owners 
frequently  arise  when  the  time  comes  for  a  final  settlement. 
It  is  a  safe  and  excellent  practice  to  verify  each  of  these 
accounts  by  application  to  the  owners  at  the  close  of  each 
fiscal  year. 

§  299.    Unpaid  Dividends 

If  a  separate  bank  account  be  kept  for  payment  of  divi- 
dends, there  should  be  no  difficulty  in  ascertaining  the 
amount  of  dividends  remaining  unpaid,  by  comparing  the 
amount  paid  out  with  the  total  to  be  paid,  as  shown  by  the 
list  of  stockholders.  A  schedule  thereof  should  accompany 
the  balance  sheet. 

§  300.    Rents  and  Repairs 

The  amount  of  detailed  checking  which  these  accounts 
require  depends  largely  upon  the  excellence  of  the  internal 
check  in  the  office.  The  annual  entry  in  the  property  ledger 
of  the  gross  rents  received  from  each  piece  of  property, 
and  the  total  amount  expended  for  repairs  thereon,  affords 
a  rough  indication  as  to  the  efficiency  of  this  department, 
in  addition  to  simplifying  a  statement  of  the  net  returns. 


296  REAL   ESTATE   ACCOUNTS 

In  the  case  of  rental  agencies,  the  fact  should  be  proved 
that  all  collections  for  clients  are  properly  accounted  for 
and  that  such  clients  are  charged  with  all  amounts  spent 
on  their  behalf. 

§  301.    Reserve  Accounts 

These  vary  so  greatly  that  no  general  directions  can 
be  given.  They  should  be  shown  on  the  balance  sheet  in 
such  manner  as  to  indicate  the  nature  or  purpose  of  each 
account  (§  159). 

§  302.    Reserve  Profits 

The  audit  of  this  item  varies  according  to  the  nature  of 
the  account  and  the  manner  of  keeping  it.  Unless  a  form 
which  is  similar  to  Form  15  (§  23)  is  used,  the  profits  in  a 
Gain  on  Sales  account,  including  profits  from  all  time  sales, 
whether  on  mortgage  or  contract,  excluding  subdivision 
sales,  can  best  be  kept  and  verified  by  a  plan  such  as  is  de- 
scribed in  §  304.  This  method  applies  also  to  those  sales 
where  interest  and  other  charges  are  from  time  to  time 
debited  to  the  Income  account,  and  the  amounts  paid  by 
purchasers  do  not  therefore  represent  the  reduction  of  the 
indebtedness,  as  a  portion  of  such  payments  is  first  ap- 
plicable to  interest  and  expenses.  The  profit  earned  in  these 
cases  depends  not  on  the  amounts  paid  in,  but  on  the  amount 
by  which  the  debt  is  reduced. 

§  303.    Profit  and  Loss  Account 

This  account  should  not  be  disturbed  between  balance 
sheet  periods.  Any  items  which  may  be  written  off  be- 
tween these  periods  can  be  shown  more  clearly  by  using 
a  Profits  account  as  described  in  §  82.  A  statement  of  the 
Profit  and  Loss  account  for  the  year  should,  of  course,  ac- 
company the  balance  sheet.  The  gains  derived  from  rents, 


REAL   ESTATE   AUDITS 


297 


sales,  etc.,  should  be  grouped  together,  and  the  expenses 
of  selling  and  management  should  be  treated  in  the  same 
manner.  Such  a  statement  can  readily  be  arranged  and 
prepared  from  the  column  analysis,  as  suggested  in  Chap- 
ter XXVII. 

§  304.    Auditing  Time  Sales 

In  order  to  facilitate  the  work  of  the  auditor  in  obtain- 
ing the  amount  of  the  gain  on  sales  which  may  be  carried 
to  Profit  and  Loss  each  year,  the  following  plan  has  been 
worked  out  and  has  been  used  in  practice  for  the  last  six 
or  seven  years.  Analysis  paper  is  taken,  and  the  various 
columns  used  are  about  as  follows : 

1.  Mortgage  Number,  or  Contract  Number. 

2.  Name  of  Purchaser. 

3.  Original  Amount  of  Gain. 

4.  A  fraction  made  up  as  follows :    The  denominator 

is  the  total  amount  of  the  original  sale ;  the  nu- 
merator is  the  amount  by  which  the  balance  has 
been  reduced  since  the  last  examination. 

5.  Amount  of  Gain  Realized,  i.e.,  the  amount  of  the 

dollars  and  cents,  obtained  by  multiplying  the 
original  gain  by  the  fraction  in  the  preceding 
column. 

6.  The  Amount  of  Gain  Unrealized  at  Close  of  Year — 

obtained  by  subtracting  column  5  from  column  3. 

The  Gain  on  Sales  account  in  the  general  ledger  is  taken 
and  the  details  of  each  item  found  therein  are  entered  in 
columns  I  and  2.  Column  3  is  then  added,  and  the  total 
should,  of  course,  agree  with  the  total  credits  of  the  Gain 
account  in  the  ledger. 

The  contract  and  mortgage  ledgers  are  then  taken  and 
each  sale  is  examined  and  the  fraction  appearing  in  column 


298 


REAL    ESTATE    ACCOUNTS 


4  is  determined.  It  must  be  noted  in  this  connection  that 
the  numerator  of  the  fraction  does  not  necessarily  agree 
with  the  total  amount  of  payments,  for  if  items  for  taxes, 
insurance,  interest,  or  any  other  expense  have  been  charged 
to  an  account,  the  debt  is,  of  course,  reduced  by  the  amount 
of  payments  less  such  charges..  As  has  been  said  in  §  175, 
it  is  this  reduction,  and  not  the  amount  of  the  total  pay- 
ments, which  gives  us  the  proportion  which  we  are  entitled 
to  carry  to  Profit  and  Loss. 

The  most  convenient  practice  is  to  make  up  as  many 
such  sheets  as  are  necessary,  to  add  each  sheet  inde- 
pendently, proving  columns  3,  5,  and  6  against  each  other, 
and  adding  a  summary  sheet  on  which  the  totals  of  all  these 
sheets  appear  and  which  gives  the  totals  to  be  carried  to 
Profit  and  Loss.  If  the  sheets  of  one  year  are  kept,  they 
form  a  basis  of  the  statement  for  the  following  year;  and 
in  the  second  and  succeeding  years  columns  i,  2,  and  3  are 
used  without  rewriting.  Reference  to  them  in  following 
years  is  simplified  if,  as  each  item  is  paid,  it  is  ruled  out 
across  the  entire  page  in  colored  ink. 

If  additional  columns  7  and  8  are  employed,  the  frac- 
tion representing  the  amount  earned  for  the  second  year 
may  be  inserted  in  column  7,  and  in  column  8  the  same 
item  in  dollars  and  cents. 

Although  the  description  of  this  method  may  seem  long, 
in  practice  it  will  be  found  that  the  fractions  can  be  very 
quickly  determined  and  the  entire  sheet  completed  with  com- 
paratively little  labor. 

One  special  use  of  these  sheets  is  to  provide  the  book- 
keeper or  auditor  with  the  amount  of  profit  left  as  unearned 
by  any  one  contract  should  such  contract  be  cancelled ;  and 
it  saves  considerable  confusion,  when  drawing  the  journal 
entry  covering  such  cancellations,  if  reference  is  made  to 
these  sheets  and  the  exact  amount  of  unearned  profit  ascer- 


REAL    ESTATE   AUDITS 


299 


tainecl.  It  has  been  found  that  bookkeepers  are  usually  dis- 
posed to  write  off  the  amount  originally  credited,  which, 
of  course,  necessitates  correcting  entries  and  tends  to  ob- 
scure an  account. 

§  305.    Trustees'  Accounts 

The  forms  of  these  are  so  varied  and  so  constantly  in- 
creasing that  it  is  useless  to  attempt  to  give  even  a  list  of 
them.  It  may  be  said  in  general  that  the  details  are  usually 
described  in  a  document  in  the  nature  of  a  deed  of  trust, 
a  mortgage  agreement,  or  the  "holding"  document  of  some 
form  of  collateral  security.  Whatever  the  form  may  be, 
the  auditor  should  insist  upon  seeing  the  original  document 
or  a  reliable  copy  thereof,  from  which  he  can  make  an 
analysis  of  all  the  particulars. 

Upon  such  an  analysis  being  made,  the  auditor  should 
see  ( i )  that  the  accounts  are  so  arranged  as  to  show  clearly 
the  transactions,  especially  any  particular  points  involved, 
and  (2)  that  the  terms  of  the  agreement  have  been  com- 
plied with.  This  may  involve  an  examination  into  the  dis- 
position of  proceeds  of  sale  of  lands  involved,  the  proper 
entry  of  interest,  the  proper  lodging  of  securities,  etc. 


CHAPTER   XXX 


§  306.  Accounts  for  Office  Buildings  and  Apartment 
Houses 

Proper  accounting  for  modern  office  and  apartment 
buildings  necessitates  the  maintenance  of  accounts  which 
show  the  receipts  from  each  office,  store,  apartment,  flat, 
etc.,  and  the  total  receipts  from  each  building.  As  to  re- 
pairs, it  is  generally  proper,  in  the  case  of  apartment  houses, 
to  apportion  these  to  each  unit;  while  in  an  office  building 
this  may  be  unnecessary,  although  it  is  important  that  the 
record  show  such  details  as  repapering  or  repainting  each 
room.  There  are  also  fixed  charges,  such  as  taxes,  insur- 
ance, interest,  and  the  operating  charges  for  janitors,  heat, 
light,  water,  power,  etc. 

These  accounts  are  usually  best  kept  in  a  tabular  ledger 
similar  to  Form  16  (§  23),  which,  by  the  use  of  "short 
leaves,"  can  be  so  arranged  that  each  folio  will  contain  the 
business  for  a  year.  The  total  cash  receipts  shown  for  each 
month  will  agree  with  the  total  of  a  corresponding  column 
in  the  cash  book.  The  debit  accounts  can  be  kept  in  the 
usual  simple  form,  separate  accounts  being  opened  for  each 
building,  as : 

Building  A : 
Taxes 
Repairs 
Insurance 
Janitors 

Elevators 

\  • 

300 


AGENTS   AND   BROKERS 


301 


The  general  rules  for  the  collection  of  rents  apply  here, 
and  all  orders  for  material  and  repairs  should  be  made  out 
on  regular  forms,  a  carbon  copy  of  each  being  retained  in 
the  office.  With  such  a  system,  it  is  easy  to  prepare  an 
annual  summary,  using  Form  47  for  this  purpose. 

BUILDING  A 
REPORT  FOR  THE  YEAR  191 . . 


1  January 

February 

March 

Etc. 

REPAIRS 
Painting  Inside  

Outside   

"         Roof    

Plumbing    

Carpenter     

Elevators    

Heating  System  



Lighting                   

Fixtures  

Total  

OPERATING  EXPENSE 
Janitor  

Elevators  

Light    





Heat  

Water  

Etc.,  etc  

" 

Total  

FIXED  CHARGES 
Taxes  

Insurance  

Etc.,  etc  

Total  

GRAND  TOTAL  

Form  47.    Annual  Report  of  Office  Building 


302  REAL   ESTATE    ACCOUNTS 

§  307.    Monthly  Reports 

The  form  of  monthly  report  rendered  by  an  agent  to 
his  principal  varies  greatly.  As  a  rule,  where  an  owner 
places  several  pieces  of  property  in  the  hands  of  an  agent, 
Form  48  may  be  used.  This  statement  should  be  accom- 
panied by  a  receipt  for  each  disbursement  reported. 


.AGENT. 

DR.  to 


.OWNER 


For  ttw  Month  of 


-»£ 


DC. 


CR. 


DO. 


los 


-.  <u  our  c&buctvui 


Meo 


IS  So 


li>l\5o 


111 


-M™+ 


TUt  oudif  4oSauucxs 


Form  48.    Monthly  Report  of  Rental  Agent 


§  308.    Brokers'  Records 

The  scope  of  the  present  work  precludes  any  complete 
treatment  of  real  estate  brokerage  and  the  forms  used 
therein.  Under  the  head  of  "Commissions"  (§  309),  a  few 
simple  and  effective  rules  are  given  as  to  the  formal  ac- 
counts for  sales  and  loans.  It  is  only  possible  here  to  touch 
on  some  points  of  general  importance  in  the  brokerage  busi- 
ness, which  varies  so  greatly  in  scope  and  in  character  of 


AGENTS   AND    BROKERS 


303 


property  handled   that  the  details   of   each  case  must  be 
worked  out  as  a  separate  proposition. 

The  broker  should  keep  accurate  records  of  the  proper- 
ties he  has  for  sale,  and  these  should  be  so  arranged  that 
any  desired  reference  can  be  quickly  made.  For  this  pur- 
pose, bound  books,  cards,  and  loose  leaves  have  all  been 
pressed  into  service.  Bound  books  are  not  elastic  enough 
for  such  temporary  records,  and  cards  present  several  dis- 
advantages. A  loose-leaf  record  is  therefore  the  most 
suitable.  A  small  loose-leaf  volume  may  easily  be  carried 
while  the  broker  is  taking  a  customer  to  inspect  various 
properties,  and  the  integrity  of  the  record  is  not  destroyed, 
as  it  is  in  the  case  of  a  card  system,  from  which  cards  are 
withdrawn.  Several  copies  of  a  leaf  can  be  filled  out  at 
one  writing,  and  each  may  be  on  paper  of  a  different  color. 
This  feature  is  of  great  convenience,  for  a  broker  should 


Form  49.    Broker's  Record 


304 


REAL    ESTATE    ACCOUNTS 


have  his  properties  listed  by  (i)  owners,  (2)  localities, 
(3)  classification,  i.e.,  dwellings,  offices,  etc. 

Form  49  is  convenient  for  such  listing  and  is  kept  in 
stock  by  different  manufacturers.  Form  50  is  somewhat 
similar  and  is  suitable  when  cards  are  used.  It  is  so  simple 
that,  if  desired,  a  rubber  stamp  may  be  used  to  imprint  the 
cards.  Here,  again,  cards  and  inks  of  various  colors  may 
be  employed. 

Another  method  of  keeping  track  of  properties  is  the 
map  and  tack  system.  This  consists  of  a  large  wall  map 
of  the  city  or  neighborhood  in  which  the  broker  operates, 
mounted  preferably  on  a  backing  of  soft  wood,  together 
with  a  number  of  pins  or  small  flags  of  various  colors,  one 
color  being  used  to  indicate  property  for  rent;  another, 
dwellings  for  sale ;  etc.  When  a  piece  of  property  is  listed, 
a  pin  is  stuck  into  the  map  at  the  proper  place,  and,  if  a 
flag  is  attached,  there  is  written  on  this  the  name  of  the 
owner  and  the  price,  e.g.:  "Allen,  $4,500." 

WANTS,  BUY,  RENT  OR  SELL 

Price  $ 

Terms 

Rent    

Location By  . . .- 19. . 

Building    Story 

Rooms,  ist  Floor  2nd  3rd   

Size  Lot Alley 

Sewer Light  in  Street Light  in  House 

Bath Closet Laundry Basement Cellar 

Water Heat Barn 

Remarks 

Name  

Date  . .  .  Address 


Form  50.    Broker's  Card  Record 


AGENTS   AND    BROKERS 


305 


The  advantages  of  such  a  plan  as  a  means  of  ready 
reference  are  as  obvious  as  the  flags  themselves.  A  disad- 
vantage of  this  system  is  that  the  flags  and  pins  could  easily 
be  displaced  by  some  irresponsible  party  in  the  office,  thus 
vitiating  the  entire  system.  It  need  not  be  said  that  a  map 
and  tack  arrangement  does  not  enable  the  broker  to  dis- 
pense entirely  with  a  written  record  of  the  properties  in 
which  he  is  interested. 

§  309.    Commissions 

Bookkeeping  for  commissions  consists  in  its  simplest 
form  in  merely  recording,  through  the  cash  book,  the  com- 
missions as  collected.  It  is  the  custom,  however,  for  brokers 
engaged  in  this  class  of  business  to  attend  to  other  matters, 
such  as  procuring  abstracts  of  title,  payment  of  taxes,  etc., 
which  involve  the  payment  of  money  for  purchasers.  In 
such  cases,  a  detailed  account  of  all  transactions  should  ap- 
pear on  the  books.  Many  items,  such  as  arrears  of  taxes, 
are  easily  overlooked,  and  the  proper  protection  of  client 
and  broker  calls  for  a  full  record. 

Let  us  assume  that  the  concern  arranges  a  loan  of  $5,000 
from  John  Doe  to  Richard  Roe,  paying  $42  for  an  abstract, 
$50  for  attorney's  fees,  $2.50  for  recording  fees,  $80  for 
taxes,  $10  for  appraiser's  fee,  and  that  it  charges  $5  for 
drawing  the  papers  and  $100  as  commission  or  brokerage. 

The  expenditures  and  charges  made  by  the  concern  will 
be  entered  on  the  cash  book  to  "Doe-Roe  Loan,"  and  if 
the  amount  of  business  warrants  it,  special  columns  will  be 
reserved  on  each  side  of  the  cash  book  for  loans  and  sales. 
John  Doe  pays  the  $5,000  to  the  concern.  A  small  sub- 
ledger  (Form  13,  §  22)  is  opened  for  these  brokerage 
transactions,  the  record  of  both  kinds  being  kept  in  one 
book  under  separate  indexes  if  desired. 

On  the  general  ledger  all  the  above-mentioned  items  will 


306 


REAL    ESTATE    ACCOUNTS 


be  charged  and  credited  to  Loans  account,  either  by  indi- 
vidual items  or,  in  the  case  of  a  columnar  cash  book,  by 
monthly  totals.  The  sub-ledger  account  will  read  as  follows  : 

DOE-ROE  LOAN 


Abstract   

.  CB 

$42  OO 

John  Doe  $5,000.00 

Attorney    

...CB 

50.0O 

Recording  

.  .   CB 

2.50 

Taxes  

.  CB 

80  oo 

Appraisers   

..  CB 

IO.OO 

Drawing  Papers. 
Brokerage  

..      J 

5.00 

IOO.OO 

Paid  R.  Roe  

..  CB 

4  710.  50 

$5,000.00 

$5,000.00 

The  charges  for  drawing  papers  and  for  brokerage  are 
posted  to  the  general  ledger  from  the  following  journal 
entry : 

Loans $105 

To  Loan  Brokerage $105 

Fees  in  Doe-Roe  loan";  commission,  $100;  drawing 
papers,  $5. 

Such  an  account  shows  at  once  the  payment  of  all 
deductions  for  which  the  concern  is  accountable,  and  the 
state  of  any  transaction  may  be  seen  at  any  time.  It  also 
shows  clearly  the  profit  from  this  particular  class  of  busi- 
ness. If  Richard  Roe  has  sold  the  property  to  John  Doe, 
the  same  entries  might  equally  well  appear,  except  that  the 
brokerage  journal  entry  would  read  as  follows : 

.  $.. 


Sales  

To  Sale  Brokerage 

Brokerage  in  Roe-Doe  sale. 


CHAPTER  XXXI 
REAL    ESTATE   ORGANIZATIONS 

§  310.    Abstract  Companies 

In  some  states  there  are  so-called  "abstract  companies," 
whose  business  it  is  to  keep  abstracts  of  public  records  and 
to  prepare  an  abstract  of  title  to  any  piece  of  property  de- 
sired. In  other  states,  titles  are  insured  by  title  guaranty 
companies  under  "title  policies."  It  is  not  proposed  to  dis- 
cuss here  the  form  of  these  abstracts  or  policies,  or  the 
method  of  preparing  them,  but  merely  to  consider  the  papers 
after  they  reach  the  real  estate  concern. 

The  only  safe  rule  is  never  to  buy  real  estate  without 
some  such  abstract.  It  is  the  accountant's  duty  to  see  that 
such  a  document  accompanies  the  other  papers  when  any 
property  is  acquired.  As  these  abstracts  and  policies  rep- 
resent money,  and  sometimes  large  sums,  they  should  be 
dealt  with  as  carefully  as  cash.  They  are  perhaps  harder 
to  keep  track  of,  more  particularly  because  they  are  so  fre- 
quently borrowed  by  prospective  purchasers  or  their  agents 
or  attorneys. 

An  easy  method  of  caring  for  abstracts  is  to  number 
each,  as  soon  as  received,  with  the  real  estate  number  of  the 
property  covered,  and  then  to  keep  them  in  numerical  order 
in  a  division  of  the  safe  or  vault  reserved  for  such  purpose. 
In  this  way  any  abstract  can  be  found  almost  instantly. 

As  practically  every  purchaser,  after  receiving  his  deed, 
borrows  this  abstract  for  examination,  a  record  of  abstracts 
loaned  from  the  office  is  a  necessity.  The  following  form, 
which  is  kept  in  a  small  loose-leaf  binder,  has  led  to  the  sav- 

307 


308  REAL   ESTATE   ACCOUNTS 

ing  of  large  sums  of  money  in  the  course  of  some  years' 
use.  As  many  lines  as  necessary  should  be  provided  under 
each  heading. 


DEED 
ABSTRACT  No. 


papers 

Sent  to 

For 

Date 

I    hereby    acknowledge    receipt    of    the    above- 
mentioned  papers  and  undertake  to  return  same 

to  the ;  or,  when  called  upon  to 

do  so  by  said  Company,  to  provide  at  once  new 

copy  of  same  prepared  by  the Abstract 

Title  and  Security  Company,  at  my  own  expense. 


Form  51.  Record  of  Abstracts  Loaned 

On  the  final  disposition  of  a  piece  of  property  and  the 
delivery  of  deeds,  etc.,  the  abstract  is  usually  delivered  to 
the  purchaser,  or  the  policy  is  indorsed  in  favor  of  the  pur- 
chaser. In  such  case  there  should  be  inserted  in  the  abstract 
file  a  slip  of  paper  the  same  size  as  the  folded  abstract, 
bearing  the  number  of  the  abstract  or  policy  so  delivered 
and  showing  the  disposition  thereof. 

§  311.    Leasehold  Companies 

There  is  a  class  of  concerns  differing  from  agencies, 
sometimes  known  as  leasehold  companies,  which  rent  from 
owners  office  buildings  and  similar  properties,  and  operate 
them  at  their  own  risk  and  for  their  own  profit.  The  ac- 
counts of  these  companies  will,  of  course,  be  on  lines  almost 
identical  with  those  of  an  agent. 


REAL   ESTATE   ORGANIZATIONS 


309 


§312.    Building  and  Loan  Societies 

While  the  number  of  these  societies  is  perhaps  decreas- 
ing, many  are  still  in  active  business.  The  details  con- 
nected with  their  work,  however,  lie  outside  the  limits  of 
the  real  estate  office  and  of  the  present  volume.  In  a  gen- 
eral way  it  may  be  said,  that  these  companies  depend  upon 
the  interest  and  fees  which  they  charge  their  borrowers, 
the  former  being  calculated  by  one  of  the  methods  described 
in  Chapter  XIX. 

The  question  of  ascertaining  the  profits  of  such  societies 
is  not  a  difficult  one  when  proper  tables  are  prepared  to 
facilitate  the  apportionment  of  receipts  and  outstanding 
mortgages  between  the  income  and  investment  accounts. 
The  use  of  a  columnar  ledger  or  columnar  journal  fre- 
quently results  in  a  great  saving  of  time,  and  yields  clearer 
results  than  do  the  more  usual  forms. 

§  313.    Cemeteries 

As  the  business  of  a  cemetery  company  or  association 
is  based  upon  dealings  with  land,  it  seems  appropriate  that 
the  accounts  of  such  concerns  should  be  mentioned  here. 
In  the  case  of  a  cemetery  company  organized  for  profit,  few 
difficulties  are  encountered.  A  tract  of  land  is  bought,  sub- 
divided, and  sold,  each  sale  yielding  its  profit,  while  the 
expenses  of  maintenance  and  operation  are  chargeable 
against  the  income.  No  difficulty  should  be  experienced 
in  arriving  at  the  results  of  the  business  for  any  given 
period. 

There  are,  however,  springing  into  existence  through- 
out the  country  cemetery  associations  which  are  not  or- 
ganized for  profit,  but  for  the  purpose  of  providing  in  per- 
petuity a  burial  place.  Such  an  association  also  provides 
for  the  perpetual  care  and  beautifying  of  the  cemetery  as 
a  whole,  as  well  as  for  the  proper  maintenance  of  the  in- 


REAL    ESTATE    ACCOUNTS 

dividual  plots  that  may  be  placed  in  its  care  by  the  owners. 
Any  surplus  is  devoted  to  further  improvements  or  placed 
in  a  reserve,  but  in  no  case  assumes  the  form  of  dividend  or 
profits. 

In  order  to  carry  out  such  provisions,  it  is  necessary  to 
establish  separate  trust  funds,  the  income  from  each  of 
which  is  devoted  to  a  specific  purpose,  such  as  general  main- 
tenance, general  improvement,  perpetual  care  of  lots,  etc. 

To  devise  a  system  of  accounts  to  cover  these  various 
matters,  and  to  provide  as  far  as  possible  for  the  future  so 
that  an  auditor,  fifty  or  a  hundred  years  hence,  may  easily 
trace  the  history  of  each  trust  fund  established,  is  a  matter 
of  unusual  complexity  and  should  be  placed  in  the  hands  of 
a  competent  accountant. 

§  314.    Cemetery  Subdivision  Accounts 

Cemetery  accounts  dealing  with  land  present  a  problem 
very  similar  to  that  discussed  in  Chapters  XXII  and  XXIII, 
under  "Subdivision  Properties."  As  a  rule,  a  tract  of 
acreage  land  is  bought  and  occasionally  the  whole  of  this 
is  at  once  platted,  improved,  and  developed,  but,  more  gen- 
erally, it  is  divided  into  sections  which  are  developed  one 
at  a  time. 

The  cost  of  acquiring  the  entire  tract  should  first  be 
obtained,  and  should  include  the  purchase  price  and  legal 
expenses,  together  with  such  costs  as  fencing  the  entire 
tract,  surveying  and  platting  it,  and  possibly  also  providing 
for  main  roads,  superintendent's  dwelling,  offices,  and 
greenhouses.  This  total  cost  might  also  include  the  cost 
of  any  chapels  or  mortuaries  erected;  although,  if  special 
charges  are  made  for  the  use  of  these,  it  may  be  better  to 
keep  them  by  themselves.  Frequently,  the  cost  should  in- 
clude an  estimate  of  the  expenses  for  general  improvements 
contemplated  during  the  next  few  years. 


REAL   ESTATE  ORGANIZATIONS 

The  cost  of  the  whole  being  arrived  at  and  charged  to 
Land  account,  it  is,  when  necessary,  apportioned  either  at 
so  many  dollars  per  acre  of  the  whole  tract,  or,  if  the  entire 
tract  is  divided  into  sections  which  are  to  be  developed  one 
at  a  time,  the  total  cost  is  apportioned  to  these  various  sec- 
tions. The  result  of  this  is  that  the  balance  of  the  Land 
account  always  shows  the  cost  of  the  unplatted  portion ;  the 
cost  of  each  section  as  it  is  platted  being  transferred  to 
"Platted  Land,"  or  to  "Section  No.  I,"  "Section  No. 
2,"  etc. 

When  one  or  more  sections  have  been  platted,  the  cost 
of  each  section  is  divided  among  all  the  lots  contained 
therein,  either  by  finding  the  average  cost  or  by  an  ap- 
praisement. Each  lot  is  then  treated  as  in  subdivision  prop- 
erties. The  time  of  payment  is,  however,  usually  shorter 
than  in  the  case  of  time  sales,  and  there  is  a  far  greater 
probability  that  all  lots  sold  will  be  paid  for  —  a  certainty 
arising  from  the  purpose  to  which  the  lots  are  put.  This 
being  the  case,  it  is  quite  frequently  permissible  for  such 
an  association  to  regard  the  gain  on  each  lot  sold  as 
"realized,"  although  the  actual  realization  may  be  slightly 
postponed. 

In  the  case  of  cemetery  associations  not  organized  for 
profit,  it  is  frequently  obligatory  upon  the  management  to 
transfer  a  portion  of  the  purchase  price,  or  of  the  profit,  to 
some  particular  fund.  For  this  reason,  it  saves  many  com- 
plications if  the  gain  be  always  regarded  as  "realized,"  and 
in  practice  the  lapses  will  usually  be  so  few  that  no  difficul- 
ties will  be  experienced  in  charging  back  the  profits  in  these 
cases. 

Especial  care  must  be  taken  in  differentiating  "Capital 
Expenditures"  from  those  chargeable  to  Revenue  account, 
because  it  is  usual  for  the  same  set  of  men  to  perform  serv- 
ices apparently  of  a  similar  nature  but  chargeable  to  en- 


312 


REAL    ESTATE    ACCOUNTS 


tirely  different  funds.    For  instance,  one  gang  on  the  same 
day  may: 

1.  Open  or  close  a  grave  for  a  funeral. 

2.  Work  on  an  individual  lot  taken  care  of  for  the 

owner  on  a  yearly  basis. 

3.  Work  on  a  similar  lot  which  is  under  perpetual 

care,  owing  to  a  trust  fund  having  been  formed 
for  the  purpose. 

4.  Work  on  general  flower  beds  or  shrubbery. 

5.  Work  on  grading  a  new  section  about  to  be  opened. 

6.  Work  in  greenhouses  on  growing  plants. 

Nos.  i  and  2  are  chargeable  to  two  different  operating 
accounts ;  Nos.  3  and  4,  probably  to  two  different  trust  fund 
income  accounts ;  No.  5,  to  the  capital  account  for  improve- 
ments (a  cost  account)  ;  No.  6,  to  another  operating  ac- 
count. It  is  not  necessary  to  go  further  into  details,  how- 
ever, as  enough  has  been  said  to  indicate  the  general 
methods  applicable  to  cemetery  real  estate  accounts. 


CHAPTER  XXXII 

DEPRECIATION 

§  315.    Depreciation  of  Realty 

In  real  estate  affairs,  depreciation,  properly  so  called, 
applies  to  buildings  or  improvements  only,  and  not  to  the 
land  itself.  It  is  true  that  land  values  frequently  decrease, 
but  such  decrease  is  seldom  brought  about  by  natural 
causes.  Perhaps  it  is  the  result  of  a  fictitious  initial  value, 
as  in  the  case  of  a  punctured  "boom" ;  perhaps  of  a  change 
of  fashion,  which  prevents  the  old-time  rents  from  being 
realized.  These  human  causes,  however,  do  not  imply 
change  in  the  land  itself,  but  merely  show  that  the  original 
estimate  of  the  value  was  excessive  or  that  the  demand  has 
diminished. 

As  the  process  of  depreciation  in  the  case  of  buildings 
is  constant  and  unavoidable,  it  must  be  dealt  with  in  some 
way.  If  no  notice  is  taken  of  it,  and  the  property  is  not 
sold,  the  owner  may  be  unconscious  of  it  until  a  sale  is  at- 
tempted or  a  fire  occurs.  Then  he  discovers  that  the  pros- 
pective purchaser  or  the  insurance  adjuster,  as  the  case  may 
be,  will  deduct  for  depreciation  some  material  amount  from 
what  the  owner  considers  the  present,  but  which  is  really 
the  original,  value  of  the  property. 

§  316.    Nature  of  Depreciation 

Depreciation  is  closely  allied  to  the  repairs,  renewals, 
improvements,  and  wear  and  tear,  which  have  already  been 
considered.  While  repairs  represent  the  re-establishment 
of  a  diminished  value  arising  from  use,  depreciation  rep- 

313 


REAL    ESTATE    ACCOUNTS 

resents  a  shrinkage  in  the  value  beyond  that  which  can  be 
re-established  by  mere  repairs. 

Another  characteristic  feature  of  depreciation,  and  one 
which  prevents  it  from  being  a  proper  offset  to  any  appre- 
ciation of  values,  is  the  fact  that  it  represents  what  has  gone 
and  is  already  lost,  whereas  appreciation  is  a  thing  hoped 
for  —  believed  in,  but  not  yet  realized.  "A  charge  for  de- 
preciation has  no  relation  to  profits,  and  must  be  made 
whether  profit  is  being  made  or  not;  or,  to  express  it  in 
other  words,  the  true  theory  of  depreciation  requires  the 
replacement  of  the  continuous  waste  of  capital  assets  by  the 
capitalization  of  an  equivalent  amount  of  revenue."* 

§317.     Systematic  Treatment  of  Depreciation 

The  Interstate  Commerce  Commission  has  been  one  of 
the  most  effective  factors  in  the  introduction  of  more  scien- 
tific accounting  methods  in  this  country.  This  is  not  be- 
cause of  its  legal  status  or  of  its  legal  powers,  but  because 
its  rules  are  based  on  the  collected  experience  of  a  large 
number  of  trained  men  working  on  similar  problems  under 
different  and  independent  conditions.  Perhaps  no  other  ac- 
counts have  had  the  advantage  of  such  experienced  consid- 
eration as  those  under  the  jurisdiction  of  the  Commission 
and  probably  no  other  set  of  accounting  rules  has  such  force 
as  those  which  it  has  laid  down.  The  fixed  practice  of 
charging  depreciation  runs  through  the  accounts  of  all  its 
departments,  and  this  practice  based  as  it  is  on  a  funda- 
mental principle,  cannot  fail  to  have  a  marked  effect  upon 
the  accounting  practice  of  the  American  business  world. 

§  318.    Percentage  of  Depreciation 

It  is  impossible  to  adopt  any  fixed  percentage  of  de- 
preciation on  a  given  class  of  buildings;  for  occupancy,  con- 

•R.  N.  Carter,  in  The  Accountant,  March  7,  1908. 


DEPRECIATION 


315 


struction,  and  locality  play  so  large  a  part  in  determining 
the  amount.  For  example,  a  frame  building  in  a  dry,  north- 
ern climate  will  outlive,  several  times  over,  a  building  simi- 
lar in  all  other  respects  but  situated  in  the  warm,  damp 
climate  of  some  of  the  Gulf  States.  The  difference  in  the 
life  of  materials  in  different  climates  is  demonstrated  still 
further  by  comparing  yellow  pine  railway  ties  when  laid 
in  New  England  and  in  Florida.  Again,  two  similar  and 
adjacent  buildings  will  depreciate  very  unequally  if  one  is 
occupied  by  a  careful  owner  and  the  other  by  a  careless 
tenant. 

§  319.    Calculation  of  Depreciation 

There  are  several  distinct  methods  of  calculating  de- 
preciation on  the  buildings ; 

1.  By  dividing  the  cost  of  the  building  by  the  num- 

ber of  years  it  is  expected  to  last,  and  writing 
off  each  year  an  amount  equal  to  the  quotient, 
or  by  writing  off  some  fixed  annual  sum  arrived 
at  after  considering  the  facts  of  the  particular 
case. 

2.  By  writing  off  each  year  a  fixed  percentage  on  the 

diminishing  values. 

3.  By  writing  off  each  year  a  fixed  percentage  on  the 

original  cost. 

4.  By  adding  to  the  cost  its  annual  interest  at  an 

agreed  rate,  and  at  the  same  time  writing  off 
each  year  an  amount  which  will  reduce  the  value 
of  the  building  to  zero  or  to  scrap  value  at  the 
end  of  a  given  term ;  this  is  usually  known  as 
the  "annuity  plan." 

5.  By  periodic  appraisals  of  the  buildings. 

6.  By  following  some  of  the  recognized  tables  of  de- 

preciation ;  a  method  similar  to  2. 


REAL   ESTATE    ACCOUNTS 

The  second  method  is  probably  the  one  most  generally 
adopted,  and  mainly  for  two  reasons : 

First,  it  tends  to  equalize  the  charges  of  maintenance, 
as  the  heaviest  deductions  are  made  at  the  beginning  when 
repairs  are  light,  and  diminish  as  the  expense  of  repairs 
grows  heavier. 

Second,  the  requisite  data  for  its  calculations  can  al- 
ways be  quickly  and  easily  obtained. 

Whatever  method  is  selected,  the  chief  difficulty  lies  in 
determining  the  proper  percentage  to  apply.  Those  in  gen- 
eral use  vary  from  il/2%  for  such  buildings  as  stone 
churches,  to  10%  for  frame  tenements.  An  average  figure 
would  probably  be  about  5%  for  good  frame  buildings,  and 
2^/2%  or  3%  for  brick,  stone,  or  concrete  structures.  As 
a  matter  of  fact,  this  question  can  only  be  settled  by  that 
which  is  the  basis  of  good  law  and  of  good  accountancy  — 
common  sense.  It  must  not  be  forgotten  that,  while  an  in- 
sufficient amount  may  cause  an  unexpected  loss,  an  exces- 
sive amount  tends  to  create  something  in  the  nature  of  a 
secret  reserve. 

§  320.     Depreciation  vs.  Appreciation 

It  is  probably  true  in  the  case  of  many  land  companies, 
particularly  those  whose  business  is  not  chiefly  in  the  older 
and  larger  cities,  that  there  is  ever  present  the  knowledge 
that,  while  buildings  may  be  depreciating,  the  land  is  ap- 
preciating. This  is  true  as  to  the  holdings  of  the  majority 
of  well-managed  concerns,  and  the  accountant  has  to  show 
good  cause  if  he  insists  on  writing  down  the  value  of  build- 
ings why  he  cannot  agree  to  the  writing  up  of  the  land. 

The  average  business  man  usually  agrees  that  losses 
should  be  written  off  as  soon  as  discovered  and  that  no 
profits  should  be  entered  until  earned;  yet,  when  the  ac- 
countant is  not  willing  to  regard  appreciation  of  land  as  a 


DEPRECIATION 


317 


proper  offset  to  the  depreciation  of  the  improvement,  the 
owner  often  has  the  impression  that  he  is  being  imposed 
upon.  He  fails  to  realize  that  correct  accountancy  does 
not  deprive  him  of  any  profits,  but  merely  guards  him 
against  self-deception  and  against  possible  losses  in  case 
values  should  depreciate,  the  final  result,  in  any  event,  de- 
pending upon  the  price  actually  obtained  for  the  property 
in  question.  In  this  connection  it  must  be  noted,  however, 
that  the  principles  set  forth  above  are  not  held  by  all 
authorities.  Some  accountants  believe  that  if  a  certain 
price  has  been  paid  for  a  piece  of  improved  real  estate,  no 
depreciation  should  be  shown  unless  the  value  decreases. 

§  321.    Depreciation  on  the  Balance  Sheet 

When  depreciation  on  buildings  is  taken  on  the  books, 
there  are  at  least  two  methods  of  treatment,  e.g. : 

1.  To  reduce  the  amount  of  the  Real  Estate  account 

by  the  amount  of  the  depreciation. 

2.  To  open  a  depreciation  account   (not  a  "deprecia- 

tion fund"),  which  is  credited  with  the  amount 
of  depreciation  decided  upon,  the  debit  entry  be- 
ing made  to  Profit  and  Loss  account  when  the 
property  is  finally  sold. 

The  second  is  by  far  the  better  plan,  for  it  conforms 
to  the  practice  of  having  the  Real  Estate  account  show  the 
actual  cost,  and  it  shows  plainly  the  amount  to  be  written 
off ;  it  is  clean  bookkeeping.  In  drawing  up  a  balance  sheet, 
the  amount  of  this  depreciation  should  then  show,  not  as  a 
liability,  but  as  a  deduction  from  Real  Estate : 

Real  Estate  Cost $185,000 

Less  Allowance  for  Depreciation  on 
Buildings   7>5°° 


Net  Real  Estate $177,500 


318  REAL   ESTATE    ACCOUNTS 

§  322.    Depreciation  on  Leasehold  Property    . 

While  the  remarks  already  made  apply  to  buildings  on 
freehold  lands,  it  is  evident  that  they  apply  with  even 
greater  force  to  leasehold  properties.  Whether  the  leases 
are  long  or  short,  the  sum  of  the  charges,  (i)  premium,  if 
any,  paid  for  the  lease,  and  (2)  cost  of  buildings  erected 
which  revert  to  the  owner  of  the  fee  at  the  expiration  of 
the  lease,  may  be  treated  as  an  asset  at  the  beginning  of 
the  lease,  and  should  be  reduced  by  equal  periodic  amounts 
so  that  they  disappear  when  the  lease  ends.  In  this  case, 
unlike  that  of  freehold  property,  the  value  of  the  lease  ap- 
pearing on  the  books  is  reduced  on  the  face  of  the  ledger. 

The  question  of  depreciation  has  been  discussed  fully 
and  clearly  by  eminent  writers  both  in  England  and  in  this 
country,  and  the  reader  is  referred  to  these  authors  should 
he  desire  to  pursue  the  subject  further.* 


CHAPTER   XXXIII 

INSURANCE    RECORDS 

§  323.    Expiration  Register  and  Card  System 

The  accountant  should  be  careful  to  keep  a  record  of 
the  date  on  which  each  policy  expires,  and  he  should  also 
see  that  every  building1  in  which  the  concern  has  any  in- 
terest is  properly  insured.  The  insurance  records  may  be 
kept  in  an  "expiration  register"  specially  prepared  for  the 
purpose,  or  by  means  of  a  card  system.  A  register  such  as 
is  used  by  many  fire  insurance  agents  can  be  bought  already 
ruled,  the  headings  being  self-explanatory. 

The  writer  prefers  a  card  system  for  this  purpose,  with 
ruling  as  shown  in  Form  52,  which  has  proved  itself  capable 
of  meeting  all  requirements.  Under  this  system  a  card  is 
numbered  for  each  building  to  be  insured,  the  numbers  cor- 
responding with  the  numbers  of  the  properties  shown  on 
the  property  index  and  property  ledger.  As  the  insurance 
is  written,  the  cards  are  filled  in  and  filed.  When  all  the 
cards  are  filled  out,  therefore,  we  know  that  every  building 
is  insured. 

An  even  better  method  is  to  have  a  duplicate  record, 
i.e.,  an  original  and  a  carbon  copy.  One  set  is  then  filed 
in  order  of  dates,  and  one  set  in  alphabetical  order  of 
owners. 

Another  set  of  cards  is  also  made  up  and  filed  at  the 
same  time  for  use  as  a  tickler,  this  second  set  containing  a 
card  for  each  month  of  the  next  one,  three,  or  five  years, 
according  to  the  terms  for  which  policies  are  written.  Each 
card  of  this  second  set  is  headed  with  the  name  of  its  month, 

319 


320 


REAL    ESTATE    ACCOUNTS 


and  as  each  card  of  the  first  set  is  written  out,  its  number 
is  entered  on  that  card  of  the  second  series  which  repre- 
sents the  month  in  which  the  particular  policy  expires.  The 
result  of  this  is  that  if  any  card  of  the  second  series  is  taken 
out,  we  have  before  us  a  list  of  all  policies  to  be  renewed  in 
the  particular  month  represented  by  that  card. 

At  the  end  of  each  month  in  which  expirations  occur,  all 
the  new  policies  written  during  that  month  are  checked 
against  the  expiration  card,  in  order  to  see  that  all  renewals 
have  been  properly  made ;  the  particulars  of  the  new  policies 
are  entered  on  the  proper  cards  in  the  first  series,  and  the 
property  numbers  of  the  new  policies  are  also  entered  on 
the  cards  of  the  second  series  for  the  months  in  which  they 
expire. 

The  policies  themselves  should  be  arranged  according 
to  the  months  in  which  they  expire.  This  takes  but  little 
time  and  gives  a  check  upon  the  expiration  card.  As  each 
policy  is  received,  it  should  be  examined  to  see  that  it  is 
correct  as  to  date,  amount,  name  of  assured,  and  that  it  af- 


No Property 

House 


Company 

No. 

Dated 

Expires 

Amount 

Premium 

Form  52.     Insurance  Card  Record 


INSURANCE   RECORDS 


321 


fords  proper  protection  for  the  mortgagee,  if  any.  It  will 
be  seen  that  the  simple  system  here  outlined  contains  merely 
the  records  required  by  the  assured.  It  is  not  intended  as 
a  record  for  the  insurance  agent,  which  is  necessarily  some- 
what more  complicated. 

§  324.    Life  Insurance  in  Connection  with  Time  Sales 

It  is  only  within  the  past  few  years  that  life  insurance 
has  become  so  closely  connected  with  real  estate  as  to  war- 
rant its  mention  in  a  work  such  as  this.  They  sometimes, 
however,  come  into  contact  at  two  points:  first,  in  con- 
nection with  time  sales,  and  second,  in  connection  with 
loans. 

The  simplest  example  of  insurance  in  connection  with 
time  sales  is  afforded  by  the  transactions  of  those  develop- 
ment companies  which  offer  to  sell  lots  under  an  agreement 
that  the  purchaser  is  required  to  pay  "no  interest,  no  taxes," 
and  that,  should  the  purchaser  die  during  the  life  of  the 
contract,  the  property  will  be  conveyed  to  his  estate  free  of 
all  encumbrances. 

Possibly  some  of  these  companies  may  effect  insurance 
on  the  lives  of  its  purchasers  on  a  plan  similar  to  what  is 
known  as  "industrial  insurance,"  or  some  special  form  of 
policy  under  which  the  liability  and  the  premiums  diminish 
year  by  year  as  the  liability  insured  against  decreases,  this 
form  probably  being  the  most  economical  policy  obtainable. 
In  such  cases,  all  premiums  paid  by  the  concern  should  be 
charged  to  the  expense  of  the  particular  subdivision,  and 
be  charged  against  Profit  and  Loss  at  the  closing  of  the 
books. 

It  is,  however,  a  more  general  custom  for  the  concern  to 
carry  this  insurance  itself;  that  is,  to  run  the  risks,  and,  if 
a  purchaser  die,  to  give  a  deed  of  conveyance  to  his  estate. 
In  these  cases  the  best  practice  is  to  close  the  account  of 


322 


REAL   ESTATE   ACCOUNTS 


such  a  contract  by  a  journal  entry  in  the  following  general 
form: 

Life   Insurance $ 

To  Contracts $ 

To  close  Contract  No.   121,  John  Doe,  de- 
ceased, conveyance  of  lot  ....,  blk , 

being  made  to  his  estate. 

This  entails  the  opening  of  a  Life  Insurance  account  in 
the  general  ledger,  to  which  all  such  accounts  are  charged, 
showing  in  each  case  the  subdivision  concerned;  and,  on 
the  closing  of  the  books,  the  balance  of  the  account  is  closed 
into  Profit  and  Loss.  This  is  clearer  than  carrying  it  as 
an  item  in  any  general  expense  account,  and  far  preferable. 

§    325.     Life    Insurance    in    Connection    with    Mortgages 
Payable 

Certain  life  insurance  companies  have  in  recent  years 
inaugurated  the  practice  of  lending  their  surplus  funds  on 
mortgages  at  a  low  rate  of  interest  and  free  of  brokerage, 
on  condition  that  the  mortgagor  take  out  with  the  lender 
a  life  insurance  policy,  to  such  an  amount  that  the  annual 
premiums  will  amount  to,  say,  5%  of  the  amount  of  the 
loan,  and  will  undertake  to  maintain  this  during  the  life 
of  the  loan.  The  policy  may  be  taken  out  either  on  himself 
or  on  others  designated  by  him,  and,  in  the  event  of  the 
death  of  one  of  the  insured  during  the  period  of  the  loan, 
the  insurance  is  credited  to  the  loan. 

Such  agreements  must  be  carefully  examined  to  de- 
termine the  proper  disposition  of  moneys  paid  for 
premiums.  The  interest  payments  are,  of  course,  treated 
like  all  other  interest  on  mortgages  payable.  The  premiums 
may  be  charged  to  a  Life  Insurance  account  and  carried 
as  an  asset  during  the  life  of  the  loan.  In  event  of  the 


INSURANCE   RECORDS 


323 


death  of  one  of  the  assured,  the  amount  of  insurance  col- 
lectable, less  the  premiums  paid,  may  be  debited  to  Mort- 
gages Payable  account  and  credited  to  a  special  surplus 
account. 

In  the  event  that  none  of  the  assured  dies  and  the  mort- 
gage is  satisfied  when  due,  the  amounts  paid  as  premiums 
may  remain  as  an  asset  if  the  policies  are  continued  for  the 
benefit  of  the  business,  or  if  they  have  an  exchange  or  sur- 
render value  equal  in  amount  to  these  premiums.  If,  how- 
ever, the  policies  have  no  such  value,  the  premiums  must 
be  written  off  to  Profit  and  Loss.  On  this  account,  proper 
arrangements  should  be  made  at  the  time  the  loan  is  en- 
tered on  the  books,  to  avoid  the  possibility  of  having  to 
write  off  a  considerable  sum  at  the  end  of  a  few  years. 


CHAPTER   XXXIV 

RENT  RECORDS;  BUILDING  ACCOUNTS 

RENT  RECORDS 

§  326.    Rentals 

The  work  of  the  rent  department  is  of  such  importance 
in  so  many  offices  that  a  special  consideration  of  its  ac- 
counts, in  addition  to  the  general  discussion  of  rents  in 
Chapter  XIV,  is  desirable. 

Unless  the  number  of  buildings  from  which  rent  is  to  be 
collected  is  very  small,  it  is  advisable  to  treat  the  business 
of  the  rent  department  as  distinct  from  that  of  the  general 
office,  the  rent  records  being  contained  in  a  separate  set  of 
books  consisting  of  a  cash  book,  journal,  and  ledger,  and 
the  current  funds  of  the  department  being  deposited  in,  and 
disbursed  from,  a  special  and  distinct  bank  account. 

The  basic  principle  of  rent  accounts,  large  or  small,  is 
that  the  accounts  deal  not  with  the  tenant,  but  with  the 
building.  It  is  obvious  that  if  the  account  of  any  one  build- 
ing is  kept  in  the  tenant's  name,  there  may  be  frequent 
changes  in  the  title  of  what  is  practically  one  account.  This 
is  especially  true  in  connection  with  small  tenement  property 
where  tenants  frequently  move  out,  and  even  in,  without 
notice  and  between  the  weekly  calls  of  the  collector. 

When  a  real  estate  office  has  only  a  few  buildings  to 
look  after,  it  may  not  be  necessary  to  do  more  than  to  credit 
collections  to  rents  and  expenditures  to  repairs,  using  per- 
haps a  column  in  the  cash  book  for  each  class.  This  does 
not  show  separately  the  earnings  of  each  house,  but  this 

324 


RENT    RECORDS 


325 


separate  record  may,  when  necessary,  be  kept  in  memoran- 
dum form  on  loose-leaf  ledger' sheets. 

In  those  offices  where  there  are  sufficient  houses  to  form 
what  may  be  called  an  agency,  a  complete  set  of  books  should 
be  installed.  The  advantage  of  this  is  two-fold :  it  keeps 
separate  rent  money,  part  or  all  of  which  may  belong  to 
clients,  and  it  relieves  the  general  books  of  a  large  quantity 
of  detail  without  adding  to  the  labor  required. 

§  327.    Records  Used 

The  first  record  is  the  rent  register  (Form  32)  de- 
scribed in  §  37,  and  kept  as  therein  indicated.  Each  house 
taken  in  charge  should  at  once  be  entered  on  this  record, 
and  an  account  therefor  immediately  opened  in  the  ledger. 

The  rent  receipt  book  (Form  33)  is  described  in  §  38. 
The  use  of  some  such  form  should  be  insisted  on. 

The  cash  book  is  of  the  simplest  form,  and  generally 
only  two  columns  on  each  side  are  required.  On  the  debit 
side,  the  first  column  is  for  the  entry  of  each  separate  item ; 
the  other,  for  the  entry  of  the  total  collections  for  the  day, 
which  should  also  be  the  amount  of  the  bank  deposit  on  the 
following  day.  The  other  side  of  the  cash  book  is  as  simple. 

Where  rents  are  collected  for  a  comparatively  small 
number  of  owners,  or  where  it  is  desirable  to  keep  apart 
the  collections  and  disbursements  for  one  or  more  accounts, 
a  columnar  cash  book  may  be  used,  a  column  on  each  side 
being  devoted  to  one  client.  In  this  case  the  total  bank  de- 
posit should  also  be  the  total  of  all  the  debit  columns  for 
the  day,  i.e.,  the  day's  collections.  This  method  is  con- 
venient where  the  owners  do  not  number  more  than,  say, 
twenty,  but  a  columnar  book  containing  many  more  columns 
than  this  becomes  inconvenient  to  use. 

Most  of  the  items  on  the  credit  side  will  be  weekly  pay- 
rolls or  monthly  bills,  and  each  such  item  should  be  properly 


326  REAL   ESTATE   ACCOUNTS 

distributed  before  being  entered  on  the  cash  book,  the  full 
distribution  being  shown  there,  as  this  forms  the  basis  of 
charges  against  each  building.  Sometimes  the  rent  accounts 
contain  a  General  Expense  account,  to  which  are  charged 
such  items  as  salaries  of  collectors,  maintenance  of  horses, 
buggies,  etc.  Such  an  account,  however,  usually  belongs  in 
the  general  ledger,  where  it  shows  the  expenses  incurred 
in  order  to  collect  the  rents  or  to  earn  the  rent  commissions 
shown  in  credit  accounts  on  the  general  ledger. 

§  328.    Repairs 

In  some  offices  where  many  buildings  are  cared  for,  the 
amount  of  repair  and  building  work  demands  a  constant 
force  of  workmen,  usually  under  a  foreman.  This  fre- 
quently renders  advisable  the  purchase  of  building  materials 
in  quantity,  which  are  stored  in  a  yard.  Under  these  con- 
ditions, the  rent  ledger  should  contain  a  Yard  account,  to 
which  is  charged  all  materials  not  bought  for  any  particular 
building.  Each  week  the  foreman  should  render  a  state- 
ment of  all  supplies  issued  from  the  yard  —  and  this  is 
credited  through  a  journal  entry  to  Yard  account  and 
debited  to  the  buildings  concerned  at  cost  price,  including 
hauling,  in  a  manner  similar  to  that  used  in  connection  with 
any  properly  conducted  storeroom. 

At  the  end  of  each  fiscal  period,  an  accurate  inventory 
should  be  taken  of  all  material  in  the  yard,  and  if  this  does 
not  agree  with  the  balance  in  the  Yard  account,  the  differ- 
ence is  credited  or  debited  to  Rent  account,  and  the  Yard 
account  for  the  new  year  is  opened  for  the  amount  of  the 
actual  inventory.  The  rent  ledger  must  also  include  a  Gen- 
eral Office  account,  which  is  charged  with  all  moneys  trans- 
ferred from  the  Rent  account. 

Where  it  is  the  custom  to  have  repairs  made  by  outside 
firms  of  plumbers,  builders,  etc.,  all  orders  for  such  work 


RENT  RECORDS 


327 


should  be  given  on  printed  forms,  a  carbon  copy  of  each 
being  retained  in  the  office.  These  should  be  numbered 
consecutively,  and  bound  in  the  same  manner  as  the  receipt 
books.  A  separate  order  should  usually  be  made  for  re- 
pairs on  each  house,  and  the  contractor  should  be  instructed 
to  render  a  bill  in  duplicate  for  work  done  on  each  house, 
especially  where  rents  are  collected  for  other  owners,  so 
that  such  bill  may  be  attached  to  the  monthly  statement  of 
rents  collected. 

§  37.9.    The  Rent  Ledger 

From  the  rent  cash  book  each  item  is  posted  to  the  rent 
ledger.  Several  forms  of  rent  ledger  are'  shown  in  Forms 
36  to  38  (§§  42,  43).  There  are  also  many  other  special 
forms  of  this  ledger  which  can  be  obtained  from  any  good 
stationer. 

Where  rents  are  collected  for  clients,  the  ledger  account 
of  each  house  should  show  clearly  the  name  of  its  owner. 
All  rent  accounts  can  then  be  treated  in  precisely  the  same 
manner,  whether  they. belong  to  the  concern  or  to  a  client. 
At  the  close  of  the  month,  a  regular  trial  balance  showing 
the  monthly  debits  and  credits  to  each  house,  is  taken  from 
the  rent  ledger,  which  book,  if  kept  as  above  outlined,  is 
self-balancing.  The  trial  balance  would  be  similar  to  the 
following : 

18  State  Street $50.00 

22      "          "     $20.00  50.00 

502  Main  Street  (Joe  Doe) 15.00  40.00 

45  King  Street 14.00  80.00 

80  Hospital  Street  (Richard  Roe) 150.00 

Etc.,  etc 

General  Account 845.00 


$2,453.00    $2,453.00 


328  REAL   ESTATE   ACCOUNTS 

From  this  trial  balance  a  summary  may  readily  be  pre- 
pared, classifying  the  debits  and  credits  applying  to  each 
client  and  forming  the  basis  of  the  monthly  statement  to  be 
rendered  to  each.  Supposing  that  all  collections  are  credited 
on  the  general  ledger  as  transferred  to  Rent  Department, 
the  journal  entry  would  be  of  the  following  form : 

Rent  Department $1,133 

To  Joe  Doe $485 

"    Richard  Roe 545 

"    Rent  Commissions 103 

The  account  with  each  client  should  be  carried  on  the 
general  ledger,  for  it  is  a  common  thing  for  them  to  draw, 
sometimes  in  advance,  a  fixed  or  varying  monthly  sum; 
or  it  may  be  necessary  to  charge  their  accounts  with  sums 
paid  for  insurance,  taxes,  etc.,  which  pass  only  through  the 
general  cash  book. 

§  330.     Arrangement  of  Rent  Ledger 

The  arrangement  of  the  rent  ledger  depends  upon  the 
conditions  and  upon  the  taste  of  the  individual  who  arranges 
it.  If  a  bound  ledger  is  used,  all  houses  should  be  entered 
in  a  simple  register  giving  book  number,  address  and  name 
of  owner. 

This  forms  an  index  for  each  house;  and  in  case  of 
tenement  or  similar  property,  it  affords  a  serial  number 
which  may  be  stencilled  or  painted  in  some  inconspicuous 
place  on  each  house,  in  order  to  enable  a  collector  to  identify 
it  at  once.  This  is  especially  useful  in  the  case  of  suburban 
property  where  street  numbers  are  sometimes  indefinite. 

If  a  loose-leaf  form  of  ledger  is  used,  the  accounts  may 
be  indexed  (i)  by  streets;  and  (2)  by  owners. 

If  collectors  bring  in  the  rents,  the  arrangement  by 
streets  is  far  more  convenient,  as  it  brings  together  in  the 


RENT    RECORDS 


329 


ledger,  houses  in  the  same  neighborhood  which  are  likely 
to  appear  together  in  the  collectors'  reports. 

§  331.    Rent  Collectors 

In  many  instances  it  is  necessary  to  employ  collectors. 
As  the  salaries  paid  to  collectors  are  usually  not  large 
enough  to  attract  men  of  high  clerical  training,  and  as  the 
work  entails  the  entering  of  a  large  mass  of  items,  it  is 
better  for  the  concern  and  fairer  to  the  collectors  to  provide 
a  system  of  reporting  which  shall  be  positive  and  not  in- 
volve unnecessary  labor. 

The  use  of  the  carbon  receipt  book  is  the  first  essential 
(Form  33,  §  38).  The  collector,  at  the  close  of  each  day's 
business,  should  himself  prepare  a  statement  of  his  total 
collections  (Form  35,  §  39). 

It  is  incumbent  on  anyone  handling  the  cash  of  another, 
to  render  a  statement,  and  a  rent  collector  is  no  exception 
to  this  rule.  Attention  is  called  to  this  point  because  in 
many  offices  the  preparation  of  this  report  is  left  to  some 
other  clerk.  This  tends  not  only  to  misplace  the  responsi- 
bility, but  also  leads  to  errors,  for  rent  receipts  are  often 
hurriedly  written  and  difficult  to  read.  As  the  reports 
should  show  the  name  of  each  tenant,  they  should  be  type- 
written, and  it  is  a  good  practice  to  let  the  collector  dictate 
all  such  reports  from  his  duplicate  rent  receipts  to  a 
typist 

When  the  report  is  made,  the  collections  are  added  and 
the  report  is  turned  over  to  the  cashier,  together  with  the 
receipt  book  upon  which  it  is  based  and  the  amount  of  cash 
called  for  in  the  total.  The  cashier  checks  each  receipt 
against  the  statement,  and,  as  he  does  so,  he  should  mark 
with  a  pen  or  rubber  stamp  the  receipt  itself  to  show  that 
it  is  accounted  for.  On  proving  the  additions  and  checking 
the  total  against  the  cash  received,  the  cashier  returns  all 


330  REAL   ESTATE   ACCOUNTS 

unfilled  receipt  books  to  the  collector,  and  files  the  com- 
pleted receipt  books  in  numerical  order. 

Particularly  in  the  case  of  tenements  where  the  rent  is 
paid  weekly,  it  is  necessary  for  the  collector  to  know  what 
rent  is  payable.  To  furnish  this  information,  Form  38 
(§43)  was  devised.  It  carries  the  records  of  a  large  num- 
ber of  houses  in  a  very  small  book  which  easily  fits  the 
pocket.  It  should  be  written  up  daily,  or  at  frequent  in- 
tervals, from  the  rent  ledger  by  the  collector  or  the  rent 
bookkeeper. 

§  332.    Vacant  Houses 

It  is  of  importance  that  the  office  should  be  immediately 
informed  of  any  renting  premises  which  are  vacant,  and 
each  collector  should  make  a  report  of  these  every  day.  It 
is  a  common  practice  to  keep  a  list  of  vacant  houses  on  a 
sheet  or  slate,  and  trust  to  no  other  record.  If  a  large 
number  of  houses  are  cared  for,  some  precaution  must  be 
taken  to  prevent  the  possibility  of  premises  being  over- 
looked. This  depends  largely  on  the  rent  bookkeeper,  who 
should  also  act  as  a  rental  credit  man.  The  board  described 
in  §  37,  and  originally  designed  from  a  hotel  room  board, 
has  been  found  very  serviceable  for  this  purpose. 

BUILDING  ACCOUNTS 

§  333-    Building  Operations  and  Building  Accounts 

Building  operations  fall  into  two  main  classes:  first, 
where  buildings  for  the  improvement  of  property  are 
erected  without  having  any  particular  purchaser  in  view; 
second,  where  buildings  are  constructed  for  some  definite 
purchaser.  In  both  cases,  however,  an  account  should  be 
opened  in  the  ledger  for  each  building  erected,  and  to  this 
account  should  be  charged  the  numerous  payments  that  are 


BUILDING   ACCOUNTS 


331 


called  for,  the  account  being  kept  open  until  some  time  after 
the  building  is  completed,  in  order  to  satisfy  the  owner  that 
no  liens  have  been  or  can  be  filed  against  the  building. 

If  the  building  is  of  the  first  class  mentioned  above,  the 
total  cost  on  completion  is  transferred  to  the  Improvements 
account  by  a  simple  journal  entry  such  as  follows: 

Improvements    $ 

To  Buildings  (No.  and  Street) $ 

For  the  total  cost  of  the  above  building  on 
property  No 

When  building  for  customers,  the  concern  may  perhaps 
simply  agree  to  erect  the  desired  building,  the  customer 
engaging  to  pay  the  price,  the  exact  amount  of  which  may 
not  be  finally  determined  until  the  building  is  completed. 
In  such  cases  the  Construction  account  is  treated  as  is  Im- 
provement account  in  the  entry  just  given. 

On  the  other  hand,  a  concern  will  frequently  agree  to 
build  a  house  for  a  customer  for  a  certain  amount  and  will 
then  make  a  contract  with  some  builder,  or  erect  the  build- 
ing itself,  intending  to  obtain  in  either  contingency  a  profit 
on  the  building.  In  such  cases  the  construction  account  is 
credited  and  the  purchaser  debited  with  the  price  agreed 
upon.  Upon  completion  of  the  building,  there  is  usually  a 
balance  on  one  side  of  the  ledger  or  the  other;  if  it  be  a 
credit  balance,  there  is  of  course  a  profit,  and  vice  versa. 
This  balance  is  then  carried  to  the  Profits  account,  the  entry 
in  the  ledger  indicating  that  it  is  the  profit  from  building 
operations. 

§  334.     Building  Operations — Subdividing  Costs 

It  is  sometimes  desired  to  analyze  the  cost  of  each  build- 
ing, especially  for  the  purpose  of  comparing  such  costs  with 
the  estimates.  This  can  very  readily  be  done  by  preparing 


332  REAL    ESTATE    ACCOUNTS 

some  such  schedule  as  follows,  showing  the  various  subdi- 
visions into  which  it  is  desired  to  divide  the  work : 

I.  Masonry 

2..  Carpenter  work 

3.  Roofing  and  metal  work 

4.  Plastering 

5.  Plumbing 

6.  Painting 

7.  Electric  wiring 

8.  Electric  fixtures 

9.  Mantels 

10.  Hardwood  floors 

11.  General  lumber 

12.  Mill  work 

13.  Hardware 

When  the  bills  for  these  various  items  are  approved, 
it  is  indicated  on  the  bill  to  which  divisions  the  items  are 
chargeable,  and  when  paid  the  bookkeeper  makes  the  cash 
book  entries  in  a  form  similar  to  the  following :  "Building 
Green  House,  paid  J.  Graham  (No.  5)  $75,"  the  number 
indicating  that  this  charge  pertains  to  plumbing. 

When  this  item  is  posted  to  the  ledger,  the  designating 
number  is  also  inserted.  Upon  the  completion  of  the  build- 
ing it  is  then  a  very  simple  matter  to  group  together  all 
those  amounts  indicated  by  the  same  number,  and  thus  ob- 
tain very  quickly  a  complete  analysis  of  the  cost  of  the 
building.  This  analysis  may,  if  desired,  be  entered  as  a 
memorandum  on  the  ledger  page.  It  will  frequently  happen 
that  one  bill  may  be  applicable  to  two  or  more  divisions, 
such  as  plumbing  and  roofing,  in  which  case  the  cash  book 
entry  must  be  divided  to  correspond. 


CHAPTER   XXXV 

TAXES 

§  335-    Entering  Tax  Payments  on  the  Books 

The  method  of  paying  taxes  varies  so  greatly  that  no 
general  rules  can  be  given.  In  all  cases,  however,  some 
form  of  tax  receipt  is  obtained.  Sometimes  such  a  receipt 
bears  full  description  of  the  lands;  sometimes,  if  the  list  is 
a  long  one,  the  collector  attaches  the  list  itself  to  the  re- 
ceipt form.  When  the  official  receipt  reaches  the  owner,  it 
is  immediately  carefully  checked  against  the  tax  list  in  order 
to  see  that  no  improper  changes  or  omissions  have  been 
made,  for  any  such  errors  can  best  be  corrected  immediately. 
From  these  original  tax  receipts,  entries  are  made  in  the 
property  ledgers  showing  the  number  of  each  receipt,  the 
amount  of  the  assessment,  and  the  amount  of  the  tax.  It 
is  found  convenient  and  useful  in  practice  to  enter  the  as- 
sessed value,  for  in  some  cases  (for  instance,  wild  lands) 
these  assessments  are  raised,  and  this  fact  may  escape  the 
owner's  attention,  until  he  looks  at  his  tax  record  in  the 
property  ledger,  when  the  increase  at  once  becomes 
apparent. 

Tax  receipts  should  be  carefully  preserved  in  files  of 
sufficient  size  to  receive  them  without  folding,  and  enable 
quick  reference  to  be  made  to  them.  The  receipts  for  each 
county  are  placed  together,  and  the  counties  are  arranged  in 
alphabetical  order.  It  may  be  that  some  of  the  property 
owned  lies  in  small  towns  in  various  counties,  and  that  these 
towns  also  assess  city  taxes.  In  such  cases,  this  property 
should  be  placed  at  the  end  of  the  list  for  the  county  in 

333 


334 


REAL    ESTATE   ACCOUNTS 


which  it  is  situated;  for  if  it  should  be  placed  among  the 
regular  lists,  there  is  a  possibility  of  the  receipt  being  over- 
looked. 

It  is  a  good  practice  to  make  a  note  in  red  ink  on  each 
ledger  sheet  on  which  property  subject  to  city  taxes  is  en- 
tered, similar  to  the  following:  "Pay  City  Taxes";  and 
also  to  enter  the  dates  upon  which  these  taxes  should  be 
paid,  as  these  do  not  coincide  with  the  dates  of  payment  for 
county  taxes.  The  method  followed  for  the  payment  of 
the  ordinary  city  taxes  is  exactly  similar  to  that  used  for 
the  county  taxes. 

Probably  the  simplest  way  to  enter  tax  payments  on 
the  books  is  to  charge  to  Taxes  account  each  check  as  it  is 
given,  and  when  the  final  tax  receipt  is  received  from  the 
collector,  to  pick  out  from  it  all  those  properties  upon  which 
taxes  have  been  paid  which  are  covered  by  time  sales  and 
which  are  payable  by  the  purchasers.  A  list  of  these  is 
made,  and  a  journal  entry  is  put  through  the  books  in  the 
following  form : 


Contracts 

To  Taxes 

For  the  following  taxes  for  the  year 

Contract  No Name 

Amount  . 


The  total  of  this  is  charged  to  the  Contracts  account  in 
the  general  ledger,  and  the  various  items  to  the  individual 
accounts  in  the  sub-ledger.  After  crediting  the  Tax  ac- 
count with  the  above  entries,  the  net  balance  is  carried  each 
year  direct  to  Profit  and  Loss,  the  reason  for  this  being 
discussed  in  §  68.  In  the  event  of  taxes  having  been  paid 
in  advance,  it  may  be  proper  to  carry  all  such  amounts  as 
an  asset  in  the  manner  customary  in  connection  with  pre- 
paid insurance. 


TAXES 


335 


§  336.    Mortgage  Taxes 

It  is  essential,  of  course,  that  a  concern  which  has  out- 
standing a  number  of  mortgages  receivable  should  keep 
itself  acquainted  with  the  facts  as  to  the  payment  of  the 
taxes  payable  by  the  mortgagor,  especially  as  it  is  often  the 
case  that  the  mortgagor  postpones  such  payments  and  they 


DESCRIPTION   OT  LANDS   If 
Paid  on  for  191      as  p 

ispuro  TO 

4                                                                              COU 

NTY 

y  attached  tax  receipt  nutn 

hrr 

PARTS  OF  SECTION 

5CC 

T. 

B. 

ACBC5 

ICOHis 

BATTOfMI 

VALUATION 

AMOUNT 



—  • 

—  Tn 

Form 


Tax  Return 


fall  upon  the  concern.  In  order  to  care  for  these,  separate 
tax  lists  are  made  for  each  county  and  headed  "Mortgage 
Taxes,"  and  these  lists  agree  with  the  details  given  on 
Form  53,  except  that  the  name  of  the  mortgagor  is  given 
against  each  description.  As  it  is  the  custom  in  many  states 
to  assess  the  property  under  the  name  of  the  owner,  this 
insertion  facilitates  reference  on  the  part  of  the  tax  col- 
lector. 


336 


REAL    ESTATE   ACCOUNTS 


The  safe  practice  is  to  make  lists  showing  every  piece 
of  mortgaged  property,  and  to  send  them  to  the  tax  col- 
lector a  short  time  before  the  books  are  closed,  asking  him 
to  note  all  unpaid  taxes  thereon  and  to  return  this  list  to 
the  concern.  When  such  taxes  are  paid  they  are,  of  course, 
charged  direct  to  "Mortgage  Taxes"  and  should  not  go 
through  the  regular  tax  accounts.  It  is  to  be  noted,  also, 
that  occasionally  taxes  include  certain  assessments  for  im- 
provements, such  as  draining  wild  lands.  Each  such  case 
must  be  taken  on  its  own  merits,  as  it  is  possible  that  the 
amounts  paid  for  these  assessments,  although  paid  with 
taxes,  may  properly  be  chargeable  to  Improvements. 

§  337-    Descriptions 

Before  leaving  the  subject  of  taxes,  one  other  difficulty 
should  be  mentioned,  and  that  is  the  various  descriptions  of 
the  property  used  by  the  assessors  and  collectors.  In  the 
case  of  an  irregular  piece  of  land  the  full  description  of 
which  by  metes  and  bounds  occupies  many  lines,  or  even 
pages,  it  is  manifestly  impossible  for  the  full  description  to 
appear  on  the  tax  books.  The  assessor  therefore  seeks  a 
shorter  description  and  defines  the  land  by  giving  the  book 
and  page  on  which  is  recorded  a  deed  conveying  the  land 
in  question,  as  for  instance,  "Part  of  the  Segui  Grant,  100 
acres  in  Section  37,  T-3,  S.R.  26  E.,  as  recorded  in  Deed 
Book  B.2  p.  204." 

When  this  entry  is  first  put  on  the  books,  it  is  probably 
correct,  but  as  years  go  on  and  it  is  copied  from  roll  to 
roll,  errors  creep  in  and  the  book,  or  the  page,  or  some  num- 
ber, is  changed.  Or,  the  property  may  be  reconveyed,  and 
a  new  assessor  may  describe  it  properly  under  the  book  and 
page  in  which  the  new  deed  is  recorded.  .  Such  variations 
constantly  occur  and  render  difficult  the  reconcilement  of 
the  returns  made  with  the  receipts  obtained.  To  prevent 


TAXES 


337 


this,  reference  to  the  records  themselves  or  to  an  abstract  of 
title  is  frequently  necessary,  and  even  then  it  may  be  found 
that  the  land  has  been  assessed  under  both  descriptions.  In 
such  a  case,  proper  steps  should  be  taken  to  have  one  of 
the  assessments  cancelled. 

A  reference  to  Form  22  (§  26)  will  show  how  these 
mistakes  may  be  minimized  in  practice;  for  on  the  front 
of  the  page  is  given  the  full  description,  while  on  the  back 
thereof  is  given  the  description  or  descriptions  used  by  the 
assessors.  This  addition  to  the  usual  form  has  proved  to  be 
of  great  service  and  its  adoption  is  recommended.  In  the 
same  way,  descriptions  by  county  assessors  frequently  differ 
from  those  of  municipal  assessors,  and  these  differences 
in  the  descriptions  should  always  be  clearly  stated  on  the 
form. 

If  proper  attention  be  given  and  correct  returns  made, 
such  mistakes  can  be  cured  for  future  years,  for  almost  in- 
variably tax  assessors  are  desirous  of  bringing  their  records 
to  as  high  a  degree  of  accuracy  as  their  opportunities  will 
permit. 

§  338.     Federal  Income  Tax 

In  those  cases  where  the  fiscal  year  of  the  concern  ends 
December  31,  the  annual  return  to  be  made  in  connection 
with  the  income  tax  is  easily  prepared  from  the  balance 
sheet  and  its  accompanying  statements.  In  many  instances 
the  fiscal  year  does  not  end  on  that  date,  and  many  con- 
cerns have  been  put  to  considerable  trouble  to  prepare  an 
accurate  statement  for  the  calendar  year.  If  the  accounts 
have  been  kept  as  indicated  herein,  there  is  little  difficulty 
in  compiling  figures,  especially  if  monthly  statements  have 
been  prepared  as  suggested  in  Chapter  XXVII.  In  such 
cases  it  is  only  necessary  to  add  the  total  expenses  for  the 
twelve  months;  the  total  profits  and  the  other  figures  as 


338  REAL    ESTATE    ACCOUNTS 

to   indebtedness   can   be   supplied    from   the   current   trial 
balance. 

In  cases  where  no  monthly  statements  have  been  pre- 
pared, the  earnings  can  best  be  ascertained  in  the  manner 
indicated  in  §  259.  In  this  the  total  profits  for  the  year, 
such  as  rent,  etc.,  are  taken,  and  also  the  total  collections 
from  contracts,  while  the  profits  thereon  are  estimated  at 
a  percentage  ascertained  either  from  the  balance  sheets  of 
previous  years  or  from  an  examination  of  the  contracts 
themselves.  Such  profits,  of  course,  can  always  be  ascer- 
tained if  we  know  the  cost  of  the  properties  sold  and  the 
amount  of  the  selling  price. 

§  339-     Distinction  between  "Gains"  and  "Profits" 

The  published  decisions  of  the  Treasury  Department 
up  to  this  date  require  that  all  profits  shown  on  the  books 
in  any  year  must  be  treated  as  income  during  that  year. 
On  the  other  hand,  such  profits  as  are  lost  through  cancella- 
tions are  allowed  to  be  charged  off  as  losses  in  future  years. 
This  includes,  of  course,  gains  derived  from  real  estate  sold 
on  time;  and  the  fact  that  the  books  of  land  companies 
usually  show  such  gains  as  profits  has  necessitated,  in  many 
cases,  the  payment  of  taxes  on  profits  not  received,  not 
earned.  This  ruling  adds  to  the  importance  of  a  proper 
treatment  of  such  gains,  and  it  is  believed  that  the  methods 
described  in  Chapters  XX,  XXII,  and  XXIII  will  avoid 
these  unnecessary  tax  payments  for  book  profits.  "Gains" 
should  never  be  treated  as  profits,  nor  even  be  called 
"profits,"  and  therefore  could  not  come  under  the  existing 
decisions  as  to  profits.  The  term  "profits"  as  used  in  this 
work  apply  only  to  such  profits  as  are  fully  earned. 


CHAPTER   XXXVI 

FILING 

§  340.    Scope  of  Filing  System 

An  important  part  of  the  work  in  a  real  estate  office 
is  that  connected  with  filing  the  various  papers  and  docu- 
ments relating  to  the  business  so  that  each  may  be  found 
without  loss  of  time.  A  list  of  such  papers  would  include : 
deeds  conveying  property  to  the  concern;  abstracts  of  title 
relating  to  the  above,  and  attorney's  certificates  thereto; 
title  policies;  mortgages  receivable;  contracts  given  by  the 
concern ;  contracts  assumed  by  the  concern ;  selling  con- 
tracts; options  given  and  received;  fire  insurance  policies; 
tax  receipts ;  sundry  agreements,  leases,  releases,  etc. 

All  such  papers  should  be  kept  in  a  vault  or  safe  with 
each  class  of  documents  numbered  consecutively  (abstracts 
being  given  the  same  number  as  the  piece  of  property  to 
which  each  relates)  and  filed  in  order;  a  record  being  kept 
in  proper  books,  as  already  suggested. 

§  341.    Consecutive  Numbering 

The  advantages  of  using  consecutive  numbers  in  real 
estate  accounting  are  so  great  and  so  many  that  their  adop- 
tion is  in  many  cases  essential.  Let  us  first  consider  the 
instances  where  such  numbers  must  be  employed : 

i.  All  receipts  must  be  numbered  consecutively,  not 
only  for  convenience  of  record,  but  also  as  a  safeguard 
against  fraud.  If  several  collectors  (e.g.,  for  rents)  are 
employed,  it  is  often  wise  to  have  the  receipt  books  num- 
bered in  different  series,  each  series  being  distinguished  by 

330 


340 


REAL    ESTATE    ACCOUNTS 


a  different  letter  and  each  letter  being  assigned  to  one  par- 
ticular collector. 

2.  All  checks,  whether  voucher  checks  or  otherwise, 
must  be  numbered,  and  if  several  banks  are  used,  the  checks 
on  each  bank  should  be  numbered  consecutively. 

3.  All   mortgages   receivable   should   be   consecutively 
numbered,  and  this  order  usually  affords  the  most  con- 
venient basis  of  arrangement  for  the  mortgages  receivable 
ledger.     This  instance  affords  one  of  the  exceptions  to  the 
general  rule  that  loose-leaf  records  should  be  arranged  al- 
phabetically. 

4.  Mortgages  payable  are  treated  in  the  same  manner. 

5.  General  contracts  are  usually  arranged  in  order  of 
the  serial  numbers  and  also  chronologically. 

6.  Properties   when  bought   should   receive   "property 
numbers"   (§  25),  for  this  affords  by  far  the  most  con- 
venient means  of  reference  in  all  book  and  record  entries 
relating  thereto. 

In  some  offices  where  serial  numbers  are  employed,  a 
letter  of  the  alphabet  is  selected  to  indicate  each  series  of 
numbers.  For  example : 

Mortgages  receivable  will  be  A-i,  A-2,  etc. 
payable          "      "    B-i,  B-2,     " 
contracts       "      "    C-i,  C-2,     " 

The  numbering  of  contracts  on  subdivision  properties 
is  of  especial  advantage ;  but  in  those  cases  where  the  num- 
ber of  purchasers  in  any  one  subdivision  is  large,  it  is 
usually  found  convenient  to  arrange  all  sub-ledgers  on  a 
strictly  alphabetical  basis,  and  to  use  indexes  finely  subdi- 
vided, say  1 20  divisions  to  the  alphabet. 

All  deeds  of  conveyance  should  be  numbered  serially. 
Where  subdivision  property  is  dealt  with,  a  special  deed  for 
each  division  should  be  used,  the  name  of  the  property  and 


FILING 


341 


the  grantor  being  printed,  and  in  such  instances  each  sub- 
division should  have  its  own  series  of  numbers. 

Abstracts  of  title  should  bear  the  numbers  of  the  real 
estate  to  which  they  refer,  and  should  be  filed  in  this  order 

For  renting  purposes,  where  the  list  of  houses  remains 
substantially  the  same,  it  is  frequently  convenient  to  give 
each  house,  apartment,  or  flat  a  serial  number.  In  the  case 
of  small  tenement  property,  this  method  is  particularly  val- 
uable; and  in  cases  where  street  numbers  are  lacking  or 
confused,  if  the  serial  number  can  be  stencilled  or  painted 
on  some  portion  of  the  house,  it  gives  the  collector  a  double 
check  on  the  description,  which  is  frequently  useful. 

§  342.    Sundry  Documents 

These  papers  are  perhaps  the  most  difficult  of  all  to 
file  in  such  a  way  that  any  particular  one  may  be  found 
quickly  when  necessary.  After  trying  several  methods,  the 
writer  has  adopted  the  following  plan,  which  fully  serves 
the  desired  ends : 

Each  paper  to  be  filed  is  stamped  with  a  serial  number 
and  put  in  a  manila  envelope,  which  is  stamped  with  the 
same  number.  The  envelopes  are  then  filed  in  numerical 
order,  irrespective  of  the  nature  of  the  document. 

A  double  card  index  is  used,  divided  into  two  parts,  each 
of  which  is  indexed  alphabetically.  One  of  these  parts  is 
used  for  indexing  the  names  of  the  parties  mentioned  in 
the  various  documents,  and  the  other  part  is  used  for  in- 
dexing the  nature  of  the  various  papers  filed,  such  as 
"Agreements,"  "Bills  of  Sale,"  "Escrow  Agreements," 
"Timber  Leases,"  "Affidavits,"  etc. 

Each  paper  as  it  is  filed  is  entered  in  both  parts  of  this 
index;  e.g.,  a  bill  of  sale  from  James  Young  would  be  en- 
tered on  a  card  headed  "Bills  of  Sale"  and  filed  under  "B" 
in  one  part  of  the  index,  and  would  also  be  entered  on  an- 


342 


REAL    ESTATE    ACCOUNTS 


other  card  under  "Young,  James"  and  filed  under  "Y"  in 
the  other  part  of  the  index.  Against  the  entry  on  each  card 
is  shown  the  number  stamped  on  the  envelope  in  which 
the  paper  is  filed. 

This  system  takes  but  little  time,  and  by  it  a  paper  can 
be  quickly  found  if  either  the  nature  of  the  paper  or  the 
name  of  any  party  making  it  is  known. 

§  343.    Ticklers 

In  such  a  business  as  we  have  been  considering,  there 
are  payments  of  interest  to  be  made  each  month,  as  well  as 
collections  from  mortgagors  who  are  in  arrears.  In  order 
to  insure  all  such  collections  receiving  attention,  a  tickler 
must  be  used,  such,  for  example,  as  a  bank  cashier  keeps. 
There  are  so  many  forms  of  these,  each  of  which  fills  its 
purpose,  that  no  description  of  any  one  seems  necessary. 


INDEX  TO  FORMS 

(Figures    in  parentheses    indicate  form  numbers.) 


Abstracts  loaned  (51),  308 
Account, 

expense,  analysis  of  (41),  88 
general,  monthly  schedule,  267 
subdivision,  tabular  ledger  for 

(16),  44 
Agent,   rental,   monthly  report  of 

(48),  302 
Analysis  of  expense  account  (41), 

88 

Annual    report   of    office   building 
(47),  301 

B 

Balance  sheet,  278,  279 

condensed,  280 
Brokerage  ledger  (13),  41 
Broker's  record  (49,  50),  303 


Cancellations,    monthly    schedule, 

271 

Capital  stock  ledger   (i),  14 
Card   insurance  record    (52),   320 
Card  property  record  (27,  28),  66 
Cash, 

petty,   voucher    (5),  25 

receipts,   monthly   schedule,   272 
Cash  book, 

general  (3),  19 

superintendent's    (6),  26 
Certificate  of  title  (18),  47 


City  property  ledger,  English  form 

(26),  64 

Collector,  rent,  report  of  (35),  79 
Colony  report    (46),   199 
Commissions,  earned,  ledger  (13), 

41 

payable  ledger  (12),  40 
Contracts, 
general    (u),  38 
selling,  monthly  schedule,  269 
Coupon,  mortgage   (43),  146 
Customers,      subdivision,      ledger 
(11,  14,  15,  16),  38,  42,  43,  44 

D 

Deeds, 

issued,  record  (30),  70 
received,  record   (23),  56 

E 

Earned  profits,  monthly  schedule, 

272 

Earnings,  monthly  schedule,  268 
English  form, 

city  property  ledger  (26),  64 

mortgage      interest      receivable 

(40),  87 
Expense, 

account,  analysis  of  (41),  88 

monthly  statement,  268 

H 

Histories,  subdivision  (31),  73 


343 


344 


INDEX   TO   FORMS 


Index,  property  (19),  48 
Insurance  card  record  (52),  320 
Interest, 
payable  register,  mortgage  (39), 

86 
receivable,     mortgage,     English 

form  (40),  87 

Interest-bearing     mortgage     note 
(42),  144 


Land,  timber,  record    (22a,  22b), 

54,  55 
Ledger, 

capital  stock  (i),  14 
commissions  earned  (13),  41 
commissions  payable   (12),  40 
general    (7),  29 
mortgages  payable    (9,   10),  34, 

35 

mortgages  receivable  (8),  31 
pocket  rent  (38),  84 
property,  English  form  (26),  64 
rent,   (36),  81 

tabular  (37),  82 
subdivision    customers    (14,    15, 

16),  42,  43,  44 
Listing  slip  (24),  58 
Loaned  abstracts  (51),  308 

M 

Monthly  report  of  mortgage  in- 
terest  receivable,   87 
Monthly   report   of    rental    agent 

(48),  302 

Monthly   schedules    (see   "Sched- 
ules, monthly") 
Mortgage, 
coupon   (43),   146 
interest    payable    register    (39). 
86 


interest  receivable  report,  Eng- 
lish form  (40),  87 
note, 

interest-bearing    (42),    144 
non-interest  bearing  (44),  146 
payable  ledger  (9,  10),  34,  35 
receivable  ledger  (8),  31 

N 

Non-interest     bearing     mortgage 
note  (44),  146 

Note,  mortgage, 
interest-bearing  (42),  144 
non-interest  bearing  (44),  146 


Office  building,   annual  report  of 

(47),  301 
Option  (45),  163 


Petty  cash  voucher  (5),  25 
Pocket  rent  ledger   (38),  84 
Profits, 

earned,  monthly  schedule,  272 

in  reserve,  monthly  schedule,  270 
Property, 

index  (19),  48 

ledger  (213,  2ib),  50,  51 
city,  English  form  (26),  64 

record,  card  (27,  28),  66 


Real  estate,  monthly  schedule,  269 
Receipt  book,  general  (2),  17 
Receipts, 

cash,  monthly  schedule,  272 

rent  (33),  77 
Record, 

broker's   (49,  50),  303 

deeds  issued  (30),  70 

deeds  received  (23),  56 


INDEX   TO   FORMS 


345 


Record — Continued 
insurance,  card   (52),  320 
property,  card  (27,  28),  66 
rent  (32),  75 

timber  land  (22a,  22b),  54,  55 
Rent, 

collector's  report  (35),  79 
ledger  (36),  81 
pocket   (38),  84 
tabular  (37),  82 
receipts  (33),  77 
record  (32),  75 
report   (34,  35,  47,  48),  78,  79, 

301,  302 
Report, 
annual,  of  office  building   (47), 

301 

colony  (46),  199 
mortgage  interest  receivable,  87 
rent    (34,   35,   47,   48),    78,   79, 

301,  302 
rental  agent, 
annual  (47),  301 
monthly  (48),  302 
rent  collector's  (35),  79 
sale   (17),  46 

Reserve,  profits  in,  monthly  sched- 
ule, 270 
Return,  tax  (53),  335 


Sale, 

report  of  (17),  46 
Sales, 

monthly  schedule,  271 
Schedules,   monthly, 

accounts  general,  267 


cancellations,  271 

cash  receipts,  272 

contracts,   selling,  269 

earned  profits,  272 

earnings,   268 

expense,  268 

profits  in  reserve,  270 

real  estate,  269 

sales,  271 

summary,  271 

Selling  contracts,  monthly  sched- 
ule, 269 

Slip,  listing  (24),  58 
Stock,  capital,  ledger  (i),  14 
Subdivision, 

accounts,     tabular     ledger     for 
(16),  44 

customers    ledger     (u,    14,    15, 
16),  38,  42,  43,  44 

histories  (31),  73 

tickler   (29),  68 

Superintendent's    cash   book    (6), 
26 


Tabular  rent  ledger   (37),  82 
Tax  return  (53),  335 
Tickler,  subdivision    (29),  68 
Timber  land  record  (22a,  22b),  54, 

55 

Title,  certificate  of  (18),  47 
Tract  book  (20),  49 
Trial  balance,  222-225 


Voucher,  petty  cash  (5),  25 


GENERAL  INDEX 


Abstract  companies,  307,  308 
Accounts, 

acquisition  of  real  estate,  91 

agents',  300-302 

audit  details,  286-299 

balance  sheet,  274 

branch  office,  247 

brokers',  302-306 

building,  324-331 

cancellation    of    contracts,    187, 
271 

cash  receipts,  272 

contracts,  159,  215,  269-271 
selling,  269 

cost  of  improvements,  193 

earnings,  201,  268,  272 

expense,  268 

general,    monthly   schedule,   267 

increased  value,  134 

insurance,  319-323 

payable,  220 

real    estate,    monthly    schedule, 
269 

rent  records,  324-331 

reserve  profit,  205,  270 

sales,   1 10,  271 

summary,  monthly  schedule,  271 

taxes,  333 

trial  balance,  217-259 
Accrued  interest,  not  due,  177 
Acquirement  of  real  estate,  90-95, 
192 

accounting  procedure,  91 

contracts  payable,  95 

cost  of,  96 

entries  required,  92 


methods  of,  90 
mortgages  payable,  92 
mortgagor,  legal  obligations  of, 

93 

trusts  and  trustees,  95 
Additions,  defined,  99 
Adjustments,  interest,  168 
Advances, 

to  salesman,  account,  234 

to  settlers,  198-200 
Advertising, 

account,  221,  233 

expense,  197,  233 
Agents, 

rental,  300-302 
annual  report,  301 
monthly  report,  302 

selling  contracts,  214 
Agricultural  properties, 

operation  of,  profits,  138 
Annual  report, 

rental  agent,  302 

schedules  for,  281 
Annuity,  tables,  149 
Apartment  house  accounts,  300 
Appraisal  of  property,  122,  290 
Appreciation,  316 
Arrears,  payments  in,  186,  206 
Assessments,  108 
Assets,  verification  of,  283 
Associations,     real     estate       (See 
"Real    estate    organizations") 
Audits,  283-299 

appraisal  certificates,  290 

assets,  verification  of,  283 

bills  payable,  294 

cash  disbursements,  288 


347 


GENERAL   INDEX 


Audits — Continued 
cash  receipts,  287 
commission  accounts,  291 
contracts  payable,  204 
dividends,  unpaid,  295 
equipment,  293 
examination  of  records,  285 
method  of  conducting,  287 
mortgage  frauds,  285 
mortgages  payable,  294 
mortgages  receivable,  290 
profit  and  loss  account,  296 
property  ledger,  289 
purchase  accounts,  295 
rent  and  repairs,  295 
reserve  account,  296 
reserve  profits,  296 
stock,  capital  and  treasury,  294 
subdivision  property,  292 

histories,  293 

sales,  293 

sundry  creditors,  294 
sundry  debtors,  294 
time  sales,  297 
trustees'  accounts,  299 
Automobiles  account,  221 

B 

Balance  sheet,  259,  274-282 
arrangement  of  items,  275 
Continental  form  of,  275 
depreciation,  showing  of,  317 
English  form  of,  275 
form  of,  278-280 
nature  of,  274 
schedules     accompanying,     276, 

281 
showing  of  interest  on,  177 

Banks,  cash  in   (See  "Cash") 

Banks,    treatment   of    real    estate 
values,  134 

Betterment,  defined,  99 

Bills  payable, 
account,  221 


audit  of,  294 

record,  85 
Bills  receivable, 

account,  226 

record,  85 
Books,   (See  also  "Records") 

of  account,  general,  16-29 
Borrowed  money,  profits  from,  137 
Branch  offices,  247,  257 
Brokers, 

commissions,  40,  41,  305 
ledger,  40,  41 

records,  302-306 
Building  accounts,  226,  227,  330-332 

costs,  subdivision  of,  331 
Building  and  loan  societies,  309 


Calculation  of  profits,  rule,  181 
Cancellations, 
accounts,  243 
journal  entry,  28 
monthly  schedule,  271 
of  contracts,  156,  158,  185-190 
of  subdivision  sales,  190 
of  time  sales,  185-190,  271 
profits  account,  189,  227 
Capital  stock, 
account,  227 

audit  of,  294 
Card  record, 
brokers',  304 
insurance,  320 
property,  5,  67 
Carrying  charges   (See  "Charges, 

carrying") 
Cash, 

disbursements, 
audit  of,  288 
in  bank, 
account,  259 
audit  of,  287 
book,  16-18 
monthly  schedule,  272 


GENERAL   INDEX 


349 


Cash — Continued 
payment, 
large,  119 
small,  120 
petty, 

account,  248 
receipts, 
audit  of,  287 
monthly  schedule,  272 
superintendent's,  account,  259 
Cash  book,  18-22 

entries   of  newly  acquired   real 

estate,  92 
general,  18-22 
petty,  23,  25,  248 
rent,  79,  325 
superintendent's,  25 
Cemeteries, 
associations,  309 
subdivision  accounts,  310 
Certificate  of  title  (See  "Title") 
Charges,    carrying,    102-109    (See 
also       "Interest,"       "Taxes," 
Inventories,"     "Assessments," 
"Maintenance,"         "Deprecia- 
tion") 

Charity  account,  228 
City  property  record,  60,  62,  63 
Clean  bookkeeping,  217 
Collector,  rent, 
ledger,   83 
record,  83,  329 
report  of,  77-79,  329 
Commissions, 
accounts,  audit  of,  291 
earned, 
account,  228 

accounting  procedure,  305 
ledger,  40,  41 
payable, 

account,  228,  239,  241,  247,  254 
ledger,  39 

Companies    (See  "Real  estate  or- 
ganizations") 


Concern,  definition,  3 
Continental  form  of  balance  sheet, 

275 

Contracts, 
account,  228,  230,  231,  232,  237, 

240,  243,  247,  250,  257 
accounting  procedure,  159-162 
advantages    of,    compared    with 

mortgages,  159 

amount  of   sale   must   be   defi- 
nitely stated,  154 
cancellation  of,  156-158,  185-190 

accounting  treatment,   187-191 
conditions,  153-154 
definition,  2 

farm  accounts,  254-256 
ledger,  36 

monthly  schedule,  270 
mortgages  compared  with,  158 
pass-book,   155 
payable,  2,  95 

account,  228 

audit  of  account,  294 
payment,  203 

amount  of  first,  185 

in  arrears,  186 

statement  of,  159 
record,  72 
sales  on,  121 
selling, 

account,  257 

accounting     treatment,     215- 
216,  230 

classes  of,  214 

definition,  3,  214 

monthly  schedule,  269 
simple,  152 

statements  of  account,  159 
surrender  of,  114 
villa,  accounts,  254-256 
water-front,    accounts,    254-255 
Corporate     records,       (Sec     also 

"Records") 
minute  book,  n 


350 


GENERAL   INDEX 


Corporate   records — Continued 

stock,  13 

stock  certificate  book,  12 

subscription    ledger,    15 
Costs, 

acquirement   of  property,  90-97 

basis  of  inventories,  104 

building,  331 

depreciation,  effect  on,   107 

elements  of,  96 

holding,  96,  102-108 

improvements,  97,  98 

interest   and,    103,    104,    105 

investment,  97 

maintenance,  96,  108 

operating,  96,   108 

price,   117 

subdivisions,   193-195,  202 

renewals,  98 

repairs,  98,  99 

revision  of,  194 

taxes,   102,   107 

treatment  of,  97 
Coupon,  mortgage,   146 
Creditors'  accounts,  294 


Debtors,  sundry,  schedule  of,  294 
Deeds,  93 

in  escrow,  165 

issued,  record  of,  70-72 

received,   record  of,   56,  69 
Deficiency  account,  mortgage,  246 
Definitions,  I,  2,  3,  99,  214 
Delinquents,  time  allowed,  186 
Depreciation,   313-318 

balance  sheet,  showing  on,  317 

calculation  of,  315,  316 

costs  affected  by,  107 

leasehold  property,  318 

nature  of,  313 

percentage  of,  314 

systematic  treatment  of,  314 

vs.  appreciation,  316 


Descriptions  of  property,  336 
Directors'  meetings  account,  229 
Development  property,   123     (See 

"Subdivision  property") 
Dividends,  unpaid,  account,  229 

audit  of,  295 
Documents,  sundry,  filing,  341 

E 

Earned     profits       (See     "Profits, 

earned") 

Earnings,  monthly  schedule,  268 
English  form, 

balance  sheet,  275 

mortgage      interest      receivable 
report,  87,  89 

property  ledger,  65 
Equipment,    schedules   of,   293 
Equity,  as  basis  for  calculation  of 

profits,  183 
Escrow,  165 

Examination  of  records,  285 
Exchange  of  properties,  121 
Expense,  268 

advertising,  221 

analysis  book,  89 

general,  account,  231 

legal,   114 
account,  231 

monthly  schedule,  268 

mortgage,  account,  231 

subdivisions,   197 
account,    230,    232,    237,    238, 
240,  243,  247,  250,  254 


Farm  contracts     (See  "Contracts, 

farm") 

Federal  income  tax,  337 
Field  record,  65 
Filing  system,  339-342 

consecutive  numbering,  339 

leases,  74,  341 


GENERAL   INDEX 


351 


Filing  system — Continued 
scope  of,  339 
sundry  documents,  341 
ticklers,  342 
Fire  insurance     (See  "Insurance, 

fire") 
Fixed    charges       (See    "Charges, 

carrying") 

Fluctuations  in  values,  133 
Foreclosure,    150-151 
Forfeiture    for   non-payment,    180 
Frauds,  284,  285 

Furniture    and    Fixtures    account, 
246 


Gains      (See   also   "Profits") 
account,  118,   121,  187,  230,  232, 
233,  237,  238,  240,  243,  247,  250 
definition,  2 
distinguished  from  earned  profit, 

179,  338 
Gross  and  net  rent,  127 

H 

Hidden  profits,  123 
Holding     subdivision     properties, 
213 


Improvements,  229,  255 

account,  234 

cost  of,  97,  98 

defined,   99 
Income  tax,  337 
Increase  in  value, 

accounting  procedure,    134 
Instalments,       (See     also     "Time 
sales") 

judgments,  180 

lapses,   185 

mortgage,  147,  148 

annuity  tables,  use  of,  148-150 


payments,  on  contracts,  203 
statement,  159 
Insurance, 
fire, 

account,  234 

record,  85,  319 
life, 

account,  242 

mortgages    payable    and,    322, 

323 

time  sales  and,  321 
mortgage,  account,  234 
records,  319-323 

expiration  register,  319 
Interest,  102,  105,  106,  236 
accrued,  not  due,  177 
adjustments,   168 
and  cost,  103,  104,  105 
charges,   treatment  of,   106-107, 

160 

earned,  account,  236 
mortgage   (See  "Mortgages") 
paid,  account,  236 
unearned,  169-177 

account,   236 

journal  entries,  176 

methods    of    calculating,    170- 

175 

phrasing  of  clause,  175 
Inventories, 
cost  as  basis  for,  104 
real  estate,  283 
Investment,  cost  of,  97 


Journal,  27 
Judgments,  150,  180 
account,  237 


Land  notes,  record,  85 
Leasehold, 

companies,  308 

property,  depreciation  on,  318 


352 


GENERAL   INDEX 


Leases,  126 

record  of  leases  given,  74,  341 
Ledger, 

city  properties,  60 

commissions  earned,  40,  41 

commissions  payable,  39 

general  contracts,  36 

mortgages  payable,  33 

mortgages  receivable,  30 

property,  audit  of,  289 

rent,  80-82,  327-329 
collectors',  pocket,  83 

stock,  13 

subdivision     customers,     40-44, 

210-213 
special  forms,  38,  43,  210-213, 

265,  293 

sub-ledgers,   30-44 

subscription,  15 

wild  lands,  48 
Legal  expenses,  114,  231 
Life   insurance    (See   "Insurance, 

life") 

Listing  slip,  58 
Loose-leaf  records,  5 
Lots  account,  238,  240,  241 

M 

Maintenance  costs,  96,  108 

Manufacturing  properties, 
operation  of,  profits,  137 

Map  and  tack  records,  304 

Mineral  lands,  change  in  value,  132 

Mines,  rent  from,  129 

Minute  book,  n 

Monthly   statement    (See   "State- 
ments, monthly") 

Mortgages,  142 
accounts,   294 

assumed  by  purchaser,  118,  119 
cancellation  of  contract,  156 
change  of  ownership,  150 
compared  with  contracts,  158 
coupon  form,  146 


deficiency  account,  246 
defined,  143 

foreclosure,  150-151,  180 
frauds,  285 
in  settlement,  246 
instalment,  147,  148 
insurance,  account,  234 
interest  payable, 

account,  236 

overdue  account,  236 

record,  86,  89 
interest  receivable,  166 

account,  236 

monthly  report,  87,  89 

overdue  account,  236 

record,  87,  89,  167 
legal  obligations  of  mortgagor, 

93 

ledgers,  30-36 
life  insurance,  322 
notes, 

interest-bearing,  144,  145 

non-interest  bearing,  145-147 
ownership,  change  of,  150 
payable,  33,  92 

account,  245 

audit  of,  204 

ledger,  33,  85 

time  sales  and,  322,  323 
payments  secured  by,  119 
receivable,  290 

account,  245 

ledger,   30 
taxes,  335 

account,  257 
transfer,  151 
trustee,  253 
unearned  interest,  169 

N 

Net    rent    and    net    returns,    127, 

128 

Notes, 
land,  record,  85 


GENERAL   INDEX 


353 


Notes — Continued 

mortgage,   143-147 
Numbering, 

consecutive,  in  filing,  339 


Office  buildings  accounts,  301 
Officers,  accounts  for,  5 
Operating  costs,  96,  108 
Options, 

accounting  treatment,  164,  246 

deeds  in  escrow,  165 

granted,   account,  246 

held,  account,  246 

nature  of,  163 

on  rent-producing  houses,  164 

record,  73 

refusal,  different  from,  165 
Orchards,  operation,  of,  139 
Ownership    of    mortgage,    change 
in,   150 


Payments, 

amount  of  first,   185 
cash, 

large,  119 

small,   120 
failure,  180,  237 
in  arrears,  186,  206 
instalment,  203 
methods  of, 

cash,  in 

cash  and  mortgage,  119 

cash,  note,  and  mortgage,  112 

contract,  113 

mortgage  as  part,  111-112 
statement  of,  159,  203,  204 
taxes,  entry  of,  333 
Petty   cash, 
account,  248 
book,  23 
voucher,  25 


Plat  book,  65,  69 
Postage  account,  249 
Profit  and  loss  account,  249 

audit  of,  296 
Profits, 

account,  118,  249 

annual  statement,  140 

anticipated,  124 

average,  203 

book,  178 

calculation   of   on   equity  basis, 
183 

cancellation,  account,  227 

defined,  2,  116 

earned,    118,   201-213,   245,   249, 

263,  272 

anticipation  of,  182,  183 
distinguished  from  gain,   179, 

338 

monthly  schedule,  272 
rule  for  calculating,  181 
subdivision  properties,  201-213 

equity,  basis  for  calculating,  183 

from     enhancement     of     value, 

132-137 

accounting  treatment,   134-135 
bank  practice  for,  134 
effect  on  rent  charges,  136 
fluctuations  in,  133 
mineral  lands,  132 
stockholders,  rights  of,  135 

from  operation  of, 
agricultural  properties,  137 
manufacturing  properties,  137 
orchards,  139 

from  rent,  125-131 
gross  rent  and  net  rent,  127 
net  rent  and  net  returns,  127 
of  mines  and  similar  sources, 

129-131 
time  for  entering,  128,  129 

from  sales, 
anticipated,  124 
appraisal  of  property,  122 


354 


GENERAL   INDEX 


Profits — Continued 

from  sales — Continued 

cash  payment,  119 

cost  price,  117 

development  properties,  123 

earned,  123 

exchange  of  properties,  121 

hidden,  123 

mortgage    assumed    by    pur- 
chaser, 118 

on  contract,  121 

selling  price,  117 
hidden,  123 
in  reserve, 

monthly   schedule,   270 

time     sales     on     subdivision 

properties,  ?  5 
on  borrowed  money,  137 
on  subdivisions,  244 
on  value  and  investment,  109 
reserve  account,  205,  252 
rule  for  calculating,  181 
sources  of,  116 
unearned,  205,  212,  245 
Property, 
agricultural,  138 
costs     (See  "Costs") 
descriptions,  336 
development  of,  123    (See  "Sub- 
division property") 
exchange  of,  122 
ledger, 

audit  of,  289 

English  form,  65 
manufacturing,  137 
orchards,  139 
records,  45-73 

city  properties  ledger,  60 

contracts  issued,  72 

deeds  issued,  70-72 

deeds  received,  56,  69 

field  record,  65 

index,  45,  61 

listing  slip,  58 


options  granted,  73 

plat  book,  69 

subdivision  histories,  73 

subdivision  ticklers,  67 

timber  land,  54,  55 

wild  land  ledger,  48 
subdivision      (See   "Subdivision 

property") 
suburban        (See     "Subdivision 

property") 
Purchase    account,    229,   230,   232, 

233,  237,  238,  240,  247,  257 
audit  of,  295 

R 

Real  estate, 

accounts,  monthly  schedule,  269 

acquisition    of     (See    "Acquire- 
ment of  real  estate") 

organization,  307-312 
abstract  companies,  307 
building  and  loan  societies,  309 
cemetery  companies,  309 
leasehold  companies,  308 

sales     (See  "Sales") 
Receipts, 

cash,  272 

audit  of,  287 

book,  16-18 

monthly  schedule,  272 

tax,  332 
Records, 

agents',  300-302 

bills  receivable  and  payable,  85 

brokers',  302-306 

cash  book,  18 

city  property,  60,  62,  63 

commission        (See     "Commis- 
sions") 

condensed,  9 

corporate     (See  "Corporate  rec- 
ords") 

expense   account   analysis  book, 
88,89 

general  receipt  bock,  16 


GENERAL    INDEX 


355 


Records — Continued 

insurance     (See  "Insurance  rec- 
ords") 

land  notes,  85 

list  of,  6 

loose-leaf  and  card,  5 

map  and  tack,  304 

mortgage  interest,  86,  87,  89,  167 
monthly,  87,  89 

options,  73 

property     (See  "Property  rec- 
ords") 

rent    (See  "Rent  records") 

required,  4,  6 

separate  books,  8 

timber  land,  54,  55 

use  to  officers,  4 
Refusals,  165 
Register,  mortgage  interest,  86,  89, 

167 
Renewals, 

repairs,  renewals,  and  improve- 
ments, cost  of,  98 
Rent, 

account,  251 
audit  of,  295 

agent,  245,  300-302 

enhanced  value,  effect  on,  136 

from  mines  and  similar  sources, 
129-131 

gross  and  net,  127 

lease,  126 

monthly  returns,  245 

net  rent  and  net   returns,    127, 
128 

payable  to  owners,  account,  245 

profits      from        (See     "Profits 
from  rent") 

records,  74-84,  128,  300-302,  324- 

331 

agents',  300 
cash  book,  79,  325 
collections,  77-79,  83,  84,  329 
house  addresses,  74-76,  325 


journal,  80 
leases,  74 

ledger,  80-83,  327-329 
receipt  book,  77,  325 
register,  61,  74-76,  325 
repairs,  326 
vacant  houses,  330 
report  of  agent,  301,  302 
report  of  collector,  77-79,  329 
time  for  entering,  128,  129 
Repairs,  97,  98,  295,  326 
account,  251 

audit  of,  295 
defined,  99 
Report, 

annual,  schedules  for,  281 
mortgage  interest  receivable,  87 
rent  collector's,  77-79,  329 
rental  agent's,  301,  302 
Reserve  account,  254 
Reserve  profit  account,   205,  252, 

296 

audit  of,  296 
Royalties,  brick-yard,  account,  226 


Salaries  account,  254 

Sales,   110-115      (See  also   "Time 

sales") 

account,  no,  271 
amount    of,    must   be    definitely 

stated,  154 
auditing,  297 
cancellations,  185,  271 
entries,   111-114 
final,  no 

gain  on     (See  "Gains") 
legal  expenses  of,  114 
life  insurance,  321 
monthly  schedule,  271 
profits  from     (See  "Profits") 
report,  45,  46,  92,  no 
subdivision      (See   "Subdivision 

property,  sales") 


356 


GENERAL   INDEX 


Sales — Continued 
surrender  of  contract,  114 
time     (.See  "Time  sales") 
Salesmen, 

advances  to,  account,  234,  256 
Schedules, 
annual  report,  281 
balance  sheet,  276,  281 
monthly,  267-272 
accounts,  general,  267 
cash  receipts,  272 
contracts,  selling,  269 
earned  profits,  272 
earnings,  268 
expense,    268 
profits  in  reserve,  270 
real  estate,  269 
sales,   271 
summary,  271 

Selling  contract  (See  "Contracts") 
Selling  price,  117,  202 
Settlers,  advances  to,  198 
Statements, 
annual  profits,  140 
contracts,  159 
instalment,  159 
monthly,  260-273 
advantages  of,  261,  262 
cash  receipts  schedule,  272 
comparison  of,  266 
contracts   schedule,  270 
determination  of  earned  prof- 
its, 263-265 

earnings  schedule,  268 
expense   schedule,  268 
general  accounts  schedule,  267 
method  of  preparing,  262-263 
profits  in  reserve  schedule,  270 
real  estate  schedule,  269 
selling  contracts  schedule,  269 
summary  schedule,  271 
of  contract  payments,   159 
Stationery   and   printing  account, 
254 


Stock, 
capital,  227 

audit  of,  294 
certificate  book,  12 
ledger,  13 
record,  13 
treasury  account,  258, 

audit  of,  294 
Stockholders,  rights  of,  in  case  of 

enhanced  value,  135 
Stumpage  account,  256 
Subdivision  property,  192-200, 

201-213,  231,  237,  239,  247,  249, 

254,  257 

accounts,  217-259,  310-312 
acquirement,   192 
advances  to  settlers,  198-200 
auditing,  292,  293 
average  profit,  203 
check  on  unsold  lots,  106 
cost  price,  193,  194,  202 
customers'  ledger,  40-44,  210-213 

earned     profits,     ascertaining 
from,  210-213 

special  form  of  ledger,  38,  43, 

210-213,  265,  293 
defined,  2 

expenses,  197,  238,  240 
field  record,  65 
histories,  73 

audit  of,  293 
holding,  213 
plat  books,  65,  69 
profits  on,  244 

earned,    201-213       (See    also 

"Profits,  earned") 
release    of    lots    from    encum- 
brances, 192 
sales, 

cancellation  of,  190 

selling  price,  202 

statement    of    payments,    203- 

204 
taxes,  107     (See  also  "Taxes") 


GENERAL   INDEX 


357 


Subdivision  property — Continued 
ticklers,  65,  67 
time    sales,      (See    also    "Time 

sales") 

profits  in  reserve,  205 
unsold  lots,  196 

Sub-ledger     (See  "Ledger") 

Subscription  ledger,  15 

Suburban  property     (See  "Subdi- 
vision property") 

Summary  of  accounts,  271 

Superintendent, 
cash  account,  259 
cash  book,  25 

Suspense  account,  257 


Taxes,  102,  107,  333-342 
account,  257 

descriptions,  detailed,  60,  336 
federal  income,  337 
mortgage,  335 
account,  257 
payment,  entry  of,  333 
subdivision,  107 
Ticklers,  342 

subdivision,  65,  67 
Timberland  record,  54,  55 
Time  sales,  2,  no,  141,  154 
audit  of,  297 
cancellations,  185-191 

accounting  treatment  of,   187- 

191 

classes  of,  141-142 
contracts,     152-162       (See    also 

"Contracts") 
defined,  2 

life  insurance  and,  321 
mortgages,    141-151      (See    also 
'"Mortgages") 


subdivision, 

profits  in  reserve,  205 
Title, 

certificate,  44,  47,  91 

unencumbered,   192 
Town  lots,  238,  240,  241 
Transfer  of  property,  150 
Traveling  salesmen's  account,  256 
Treasury   stock,   258 

audit  of,  294 
Trial  balance, 

analysis,  217-259 

form,  222-225 

purpose  of,  260 

schedules,    267-272       (See    also 

"Schedules,  monthly") 
Trust  companies,  134 
Trustees'  account,  253,  299 
Trusts  and  trustees,  95,  253 

U 

Unearned  profits    (See  "Profits") 
Unearned  interest   (See  "Interest, 

unearned") 
Unpaid  dividends  account,  229 

audit  of,  295 


Vacant  houses,  330 

Values,  enhancement  of,  132-137 
(See  also  "Profits  from  en- 
hancement of  values") 

Verification  of  assets,  283 

Villa  contracts  (See  "Contracts, 
villa") 

W 

Water-front  contracts    (See  "Con- 
tracts, water-front") 
Wild  land  ledger,  48 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 

Los  Angeles 
This  book  is  DUE  on  the  last  date  stamped  below. 


NOV  8     1551 
NOV  221961 


1  0 


BtC-J  6  197! 

DEC  8 

1  5  1972 


SFP1K-1<W 


WAR     5 

Form  L9-32m-8,'58(5876s4)444 


OUN24-9JDD 

*WR  13  1975 


AUG  19  I98!i 

AU617-8 


22  I'M 


Library 
raduate  School  of  Business  Administration 

Un   - rn i *y  o f  Cal i  f orni a 


UCLA-GSM  Library 

HF5686R3M8 


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A    001  260180    3 


'SOUTHERN  BRANCH 

UNIVERSITY  OF  CALIFORNIA 

LIBRARY 

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